<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1999
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-09315
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 3 [X]
(Check appropriate box or boxes)
------------------------
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
(Exact Name of Registrant as
Specified in Charter)
------------------------
800 SCUDDERS MILL ROAD PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
TERRY K. GLENN
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
800 SCUDDERS MILL ROAD,
PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL J. HENNEWINKEL, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557
</TABLE>
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Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<S> <C> <C> <C> <C>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF BEING OFFERING PRICE OFFERING REGISTRATION
SECURITIES BEING REGISTERED REGISTERED(1) PER UNIT(1) PRICE(1) FEE(2)
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Auction Market Preferred Stock.............................. 40 Shares $25,000 $1,000,000 $278
</TABLE>
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(1) Estimated solely for the purpose of calculating the filing fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 30, 1999
PROSPECTUS
$
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
AUCTION MARKET PREFERRED STOCK ["AMPS(R)"]
SHARES, SERIES A
SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
------------------------
MuniHoldings New Jersey Insured Fund IV, Inc. (the "Fund") is a recently
organized, non-diversified, closed-end management investment company that seeks
to provide shareholders with current income exempt from Federal income tax and
New Jersey personal income taxes. The Fund seeks to achieve its objective by
investing primarily in a portfolio of long-term, investment grade municipal
obligations the interest on which, in the opinion of bond counsel to the issuer,
is exempt from Federal income tax and New Jersey personal income taxes. The Fund
intends to invest in municipal obligations that are rated investment grade or,
if unrated, are considered by the Fund's investment adviser to be of comparable
quality. Under normal circumstances, at least 80% of the Fund's assets will be
invested in municipal obligations with remaining maturities of one year or more
that are covered by insurance guaranteeing the timely payment of principal at
maturity and interest.
------------------------
This prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference. This Fund's statement of additional information contains
further information about the Fund and is incorporated by reference (legally
considered to be part of this prospectus). You may request a free copy by
writing or calling the Fund at (800) 637-3863.
------------------------
INVESTING IN THE AMPS INVOLVES CERTAIN RISKS, WHICH ARE DESCRIBED IN THE
"RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 5 OF THIS
PROSPECTUS.
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price........... $25,000.00 $
Sales Load...................... $ $
Proceeds, before expenses, to
Fund.......................... $ $
</TABLE>
The public offering price per share will be increased by the amount of
accumulated dividends, if any, from the date the shares are first issued.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
One certificate for each series of the AMPS will be ready for delivery to
the nominee of The Depository Trust Company on or about , 1999.
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(R) Registered trademark of Merrill Lynch & Co., Inc.
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MERRILL LYNCH & CO.
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The date of this prospectus is , 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Offering Summary............................................ 3
Risk Factors and Special Considerations..................... 5
The Fund.................................................... 7
Use of Proceeds............................................. 7
Capitalization.............................................. 7
Portfolio Composition....................................... 8
Investment Objective and Policies........................... 8
Description of AMPS......................................... 15
The Auction................................................. 22
Rating Agency Guidelines.................................... 31
Investment Advisory and Management Arrangements............. 33
Taxes....................................................... 34
Description of Capital Stock................................ 35
Custodian................................................... 38
Underwriting................................................ 38
Transfer Agent, Dividend Disbursing Agent and Registrar..... 39
Legal Opinions.............................................. 39
Experts..................................................... 39
Year 2000 Issues............................................ 39
Table of Contents of Statement of Additional Information.... 40
Glossary.................................................... 41
</TABLE>
------------------------
INFORMATION ABOUT THE FUND CAN BE REVIEWED AND COPIED AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. CALL 1-800-SEC-0330 FOR INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM. THIS INFORMATION IS ALSO AVAILABLE ON
THE SEC'S INTERNET SITE AT HTTP://WWW.SEC.GOV AND COPIES MAY BE OBTAINED UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, D.C. 20549-6009.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume that the information
appearing in this prospectus is accurate as of the date on the front cover of
this prospectus only. Our business, financial condition, results of operations
and prospects may have changed since that date.
2
<PAGE> 4
OFFERING SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus and the statement of additional
information.
THE OFFERING The Fund is offering a total of shares of Series A AMPS and
shares of Series B AMPS each at a purchase price of $25,000
per share plus accumulated dividends, if any, from the date the
shares are first issued. The shares of AMPS are being offered by
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
underwriter.
The AMPS of each series will be shares of preferred stock of the
Fund that entitle their holders to receive cash dividends at an
annual rate that may vary for the successive dividend periods
for each series. In general, except as described below, each
dividend period for each series of AMPS following the initial
dividend period will be seven days. The applicable dividend for
a particular dividend period will be determined by an auction
conducted on the business day next preceding the start of that
dividend period.
Investors and potential investors in shares of AMPS of each
series may participate in auctions for the AMPS through their
broker-dealers.
Generally, AMPS investors will not receive certificates
representing ownership of their shares. Ownership of AMPS will
be maintained in book-entry form by the securities depository
(The Depository Trust Company) or its nominee for the account of
the investor's agent member (generally the investor's
broker-dealer). The investor's agent member, in turn, will
maintain records of such investor's beneficial ownership of
AMPS.
DIVIDENDS AND Dividends on the Series A AMPS and Series B AMPS will be
DIVIDEND cumulative from the date the shares are first issued and payable
PERIODS beginning on , 1999 in the case of Series A AMPS and
, 1999 in the case of Series B AMPS. Thereafter, in
the case of dividend periods that are not special dividend
periods, dividends generally will be payable on each succeeding
in the case of Series A AMPS, and each succeeding
in the case of Series B AMPS. After the initial
dividend period, each dividend period for each series of AMPS
will generally consist of seven days; provided, however, that
before any auction, the Fund may decide, subject to certain
limitations and only if it gives notice to holders, to declare a
special dividend period of up to five years.
Dividends for each series of AMPS will be paid through the
securities depository (The Depository Trust Company) on each
dividend payment date for each series.
The cash dividend rate on the shares of Series A AMPS for the
initial dividend period ending , 1999 will be %
annualized and the cash dividend rate on the shares of Series B
AMPS for the initial dividend period ending , 1999
will be % annualized. For each subsequent dividend period, the
auction agent (IBJ Whitehall Bank & Trust Company) will hold an
auction to determine the cash dividend rate on the shares of
AMPS.
3
<PAGE> 5
DETERMINATION Generally, the applicable dividend rate for any dividend period
OF MAXIMUM for shares of AMPS of each series will be subject to a maximum
DIVIDEND RATES applicable rate. The maximum applicable rate for shares of AMPS
will depend on the credit rating assigned to the shares and on
the length of the dividend period. There is no minimum
applicable dividend rate for any dividend period.
ASSET Under the Fund's Articles Supplementary creating the AMPS, the
MAINTENANCE Fund must maintain
- asset coverage of the AMPS as required by the rating agencies
rating the AMPS, and
- asset coverage of the AMPS of at least 200% as required by the
Investment Company Act of 1940.
The Fund estimates that, based on the composition of its
portfolio at , 1999, asset coverage of the AMPS as
required by the Investment Company Act of 1940 would be
approximately % immediately after the Fund issues the shares
of AMPS offered by this prospectus representing approximately
% of the Fund's capital.
MANDATORY If the required asset coverage is not maintained or, when
REDEMPTION necessary, restored, the Fund must redeem shares of AMPS at the
price of $25,000 per share plus accumulated but unpaid dividends
thereon (whether or not earned or declared). The provisions of
the Investment Company Act of 1940 may restrict the Fund's
ability to make such a mandatory redemption.
OPTIONAL The Fund may, at its option, choose to redeem all or a portion
REDEMPTION of the shares of AMPS of each series on any dividend payment
date at the price of $25,000 per share, plus accumulated but
unpaid dividends thereon (whether or not earned or declared)
plus any applicable premium.
LIQUIDATION The liquidation preference (that is, the amount the Fund must
PREFERENCE pay to AMPS shareholders if the Fund is liquidated) of each
share of AMPS will be $25,000, plus an amount equal to
accumulated but unpaid dividends (whether or not earned or
declared).
RATINGS The AMPS will be issued with a rating of "aaa" from Moody's
Investors Service, Inc. and AAA from Standard & Poor's.
VOTING RIGHTS The Investment Company Act of 1940 requires that the holders of
AMPS and any other preferred stock, voting as a separate class,
have the right to elect at least two directors at all times and
to elect a majority of the directors at any time when dividends
on the AMPS or any other preferred stock are unpaid for two full
years. The Fund's charter and the Investment Company Act of 1940
require holders of AMPS and any other preferred stock to vote as
a separate class on certain other matters.
4
<PAGE> 6
RISK FACTORS AND SPECIAL CONSIDERATIONS
New Jersey Municipal Bonds. The Fund intends to invest the majority of its
portfolio in New Jersey municipal bonds. As a result, the Fund is more exposed
to risks affecting issuers of New Jersey municipal bonds than is a municipal
bond fund that invests more widely.
Interest Rate and Credit Risk. The Fund invests in municipal bonds, which
are subject to interest rate and credit risks. Interest rate risk is the risk
that prices of municipal bonds generally increase when interest rates decline
and decrease when interest rates increase. Prices of longer term securities
generally change more in response to interest rate changes than prices of
shorter term securities. Credit risk is the risk that the issuer will be unable
to pay the interest or principal when due. The degree of credit risk depends on
both the financial condition of the issuer and the terms of the obligation.
Non-diversification. The Fund is registered as a "non-diversified"
investment company. This means that the Fund may invest a greater percentage of
its assets in a single issuer than a diversified investment company. Even as a
non-diversified fund, the Fund must still meet the diversification requirements
of applicable Federal income tax laws. Since the Fund may invest a relatively
high percentage of its assets in a limited number of issuers, the Fund may be
more exposed to any single economic, political or regulatory occurrence than a
more widely-diversified fund.
Rating Categories. The Fund intends to invest in municipal bonds that are
rated investment grade by Standard & Poor's, Moody's Investors Service, Inc. or
Fitch IBCA, Inc. It may also invest in unrated municipal bonds that the Fund's
investment adviser believes are of comparable quality. Obligations rated in the
lowest investment grade category have certain speculative characteristics.
Private Activity Bonds. The Fund may invest in certain tax-exempt
securities classified as "private activity bonds." These bonds may subject
certain investors in the Fund to the Federal alternative minimum tax.
Portfolio Insurance. The Fund will be subject to certain restrictions on
investments imposed by guidelines of the insurance companies issuing the
portfolio insurance. The Fund does not expect these guidelines to prevent the
Fund's investment adviser from managing the Fund's portfolio in accordance with
the Fund's investment objective and policies.
Indexed and Inverse Floating Rate Securities. The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax exempt
securities. Both indexed securities and inverse floaters are derivative
securities and can be considered speculative.
5
<PAGE> 7
Options and Futures Transactions. The Fund may seek to hedge its portfolio
against changes in interest rates using options and financial futures contracts.
The Fund's hedging transactions are designed to reduce volatility, but come at
some cost. For example, the Fund may try to limit its risk of loss from a
decline in the price of a portfolio security by purchasing a put option.
However, the Fund must pay for the option, and the price of the security may not
in fact drop. In large part, the success of the Fund's hedging activities
depends on its ability to forecast movements in securities prices and interest
rates. The Fund does not, however, intend to enter into options and futures
transactions for speculative purposes. The Fund is not required to hedge its
portfolio and may choose not to do so. The Fund cannot guarantee that any
hedging strategies it uses will work.
Antitakeover Provisions. The Fund's charter includes provisions that could
limit the ability of other entities or persons to acquire control of the Fund or
to change the composition of its Board of Directors. Such provisions could
discourage a third party from seeking to obtain control of the Fund.
Investment Considerations. Investors in AMPS should consider the following
factors:
- The credit ratings of the AMPS could be reduced while an investor holds
the AMPS.
- Neither broker-dealers nor the Fund are obligated to purchase shares of
AMPS in an auction or otherwise nor is the Fund required to redeem shares
of AMPS in the event of a failed auction.
- If sufficient bids do not exist in an auction, the applicable dividend
rate will be the maximum applicable dividend rate, and in such event,
owners of AMPS wishing to sell will not be able to sell all, and may not
be able to sell any, AMPS in the auction. As a result, investors may not
have liquidity of investment.
Secondary Market. The broker-dealers intend to maintain a secondary
trading market in the AMPS outside of auctions; however, they have no obligation
to do so and there can be no assurance that a secondary market for the AMPS will
develop or, if it does develop, that it will provide holders with a liquid
trading market. The AMPS will not be registered on any stock exchange or on any
automated quotation system. An increase in the level of interest rates likely
will have an adverse effect on the secondary market price of the AMPS, and a
selling shareholder may have to sell AMPS between auctions at a price per share
of less than $25,000.
6
<PAGE> 8
THE FUND
MuniHoldings New Jersey Insured Fund IV, Inc. (the "Fund") is a recently
organized, non-diversified, closed-end management investment company. The Fund
was incorporated under the laws of the State of Maryland on April 5, 1999, and
has registered under the 1940 Act. The Fund's principal office is located at 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number is
(609) 282-2800.
The Fund commenced operations on upon the closing of an initial
public offering of shares of its common stock. The proceeds of such
offering were approximately $ after the payment of offering expenses.
In connection with the initial public offering of the Fund's common stock, the
Underwriter was granted an option to purchase up to an additional
shares of common stock to cover over-allotments.
USE OF PROCEEDS
The estimated net proceeds of this offering will be $ after the
payment of offering expenses (estimated to be $ ) and the sales load.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies during a period estimated not to exceed
three months from the offer and sale of such shares of AMPS depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-term
tax-exempt securities. See "Investment Objective and Policies."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of , 1999 and as adjusted to give effect to the issuance of the shares
of AMPS offered hereby.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
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<S> <C> <C>
Shareholders' equity:
Capital Stock (200,000,000 shares authorized)
Preferred Stock, par value $.10 per share (no shares issued;
shares of AMPS issued and outstanding, as adjusted,
at $25,000 per share liquidation preference).............. -- $
Common Stock, par value $.10 per share ( shares
issued and outstanding)................................... $
Capital in excess of par value attributable to Common
Stock.....................................................
Undistributed investment income -- net......................
Unrealized appreciation on investments -- net...............
----------- ------------
Net assets.................................................. $ $
=========== ============
</TABLE>
7
<PAGE> 9
PORTFOLIO COMPOSITION
As of , 1999, approximately % of the market value of the Fund's
portfolio was invested in long-term municipal obligations and approximately %
of the market value of the Fund's portfolio was invested in short-term municipal
obligations. The following table sets forth certain information with respect to
the composition of the Fund's investment portfolio as of , 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa $ %
A-1 VMIG1
-- ------- ------
Total.......................... $ %
== ======= ======
</TABLE>
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* Ratings: Using the higher of Standard & Poor's ("S&P") or Moody's Investors
Service, Inc. ("Moody's") ratings on the Fund's municipal obligations. See
"Schedule of Investments." S&P rating categories may be modified further by a
plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B
ratings.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with current
income exempt from Federal income tax and New Jersey personal income taxes. The
Fund seeks to achieve its investment objective by investing primarily in a
portfolio of long-term, investment grade municipal obligations issued by or on
behalf of the State of New Jersey, its political subdivisions, agencies and
instrumentalities, and other qualifying issuers, each of which pays interest
which, in the opinion of bond counsel to the issuer, is exempt from Federal
income tax and New Jersey personal income taxes ("New Jersey Municipal Bonds").
The Fund intends to invest substantially all (at least 80%) of its assets in New
Jersey Municipal Bonds, except at times when the Fund's investment adviser, Fund
Asset Management, L.P. (the "Investment Adviser"), considers that New Jersey
Municipal Bonds of sufficient quality and quantity are unavailable for
investment at suitable prices by the Fund. To the extent the Investment Adviser
considers that suitable New Jersey Municipal Bonds are not available for
investment, the Fund may purchase other long-term municipal obligations exempt
from Federal income tax but not New Jersey personal income taxes ("Municipal
Bonds"). The Fund will maintain at least 80% of its assets in New Jersey
Municipal Bonds, except during interim periods pending investment of the net
proceeds of public offerings of the Fund's securities and during temporary
defensive periods. Under normal circumstances, at least 80% of the Fund's assets
will be invested in municipal obligations with remaining maturities of one year
or more that are covered by insurance guaranteeing the timely payment of
principal at maturity and interest. If the Fund invests less than 80% of its
assets in New Jersey Municipal Bonds, the income provided by the Fund may not be
exempt from New Jersey personal income tax. The Fund's investment objective is a
fundamental policy that may not be changed without a vote of a majority of the
Fund's outstanding voting securities, as defined in the statement of additional
information under "Investment Restrictions." There can be no assurance that the
investment objective of the Fund will be realized. At times the Fund may seek to
hedge its portfolio through the use of options and futures transactions to
reduce volatility in the net asset value of its shares of common stock.
8
<PAGE> 10
The Fund ordinarily does not intend to realize significant interest income
that is subject to Federal income tax and New Jersey personal income taxes. The
Fund may invest all or a portion of its assets in certain tax-exempt securities
classified as "private activity bonds" (in general, bonds that benefit
non-governmental entities) that may subject certain investors in the Fund to a
Federal alternative minimum tax.
The Fund also may invest in securities not issued by or on behalf of a
state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in New Jersey Municipal Bonds and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act of 1940, as amended (the "1940 Act"). Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term New Jersey Municipal Bonds or Municipal
Bonds. Certain Non-Municipal Tax-Exempt Securities may be characterized as
derivative instruments. Non-Municipal Tax-Exempt Securities are considered "New
Jersey Municipal Bonds" or "Municipal Bonds" for purposes of the Fund's
investment objective and policies.
The investment grade New Jersey Municipal Bonds and Municipal Bonds in
which the Fund will primarily invest are those New Jersey Municipal Bonds and
Municipal Bonds that are rated at the date of purchase in the four highest
rating categories of S&P, Moody's or Fitch IBCA, Inc. ("Fitch") or, if unrated,
are considered to be of comparable quality by the Investment Adviser. In the
case of long-term debt, the investment grade rating categories are AAA through
BBB for S&P, Aaa through Baa for Moody's and AAA through BBB for Fitch. In the
case of short-term notes, the investment grade rating categories are SP-l+
through SP-3 for S&P, MIG-1 through MIG-3 for Moody's and F-1+ through F-3 for
Fitch. In the case of tax-exempt commercial paper, the investment grade rating
categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moody's and
F-l+ through F-3 for Fitch. Obligations ranked in the lowest investment grade
rating category (BBB, SP-3 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moody's;
and BBB and F-3 for Fitch), while considered "investment grade," may have
certain speculative characteristics. There may be sub-categories or gradations
indicating relative standing within the rating categories set forth above.
Appendix B to the statement of additional information contains a description of
S&P's, Moody's and Fitch's ratings of New Jersey Municipal Bonds and Municipal
Bonds. In assessing the quality of New Jersey Municipal Bonds and Municipal
Bonds with respect to the foregoing requirements, the Investment Adviser will
take into account the portfolio insurance as well as the nature of any letters
of credit or similar credit enhancement to which particular Municipal Bonds are
entitled and the creditworthiness of the insurance company or financial
institution that provided such insurance or credit enhancement. Consequently, if
New Jersey Municipal Bonds or Municipal Bonds are covered by insurance policies
issued by insurers whose claims-paying ability is rated AAA by S&P or Fitch or
Aaa by Moody's, the Investment Adviser may consider such municipal obligations
to be equivalent to AAA-- or Aaa-- rated securities, as the case may be, even
though such New Jersey Municipal Bonds or Municipal Bonds would generally be
assigned a lower rating if the rating were based primarily upon the credit
characteristics of the issuers without regard to the insurance feature. The
insured New Jersey Municipal Bonds and Municipal Bonds must also comply with the
standards applied by the insurance carriers in determining eligibility for
portfolio insurance.
9
<PAGE> 11
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial institution,
typically a commercial bank. The VRDOs in which the Fund may invest are
tax-exempt obligations, in the opinion of counsel to the issuer, that contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand on the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest on a short notice period not to exceed
seven days. Participating VRDOs provide the Fund with a specified undivided
interest (up to 100%) in the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDOs from the financial institution on a specified number of
days' notice, not to exceed seven days. There is, however, the possibility that
because of default or insolvency, the demand feature of VRDOs or Participating
VRDOs may not be honored. The Fund has been advised by its counsel that the Fund
should be entitled to treat the income received on Participating VRDOs as
interest from tax-exempt obligations for Federal income tax purposes.
The average maturity of the Fund's portfolio securities will vary based
upon the Investment Adviser's assessment of economic and market conditions. The
net asset value of the shares of common stock of a closed-end investment
company, such as the Fund, which invests primarily in fixed-income securities,
changes as the general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed-income portfolio generally can be expected to
rise. Conversely, when interest rates rise, the value of a fixed-income
portfolio generally can be expected to decline. Prices of longer-term securities
generally fluctuate more in response to interest rate changes than do short-
term or medium-term securities. These changes in net asset value are likely to
be greater in the case of a fund having a leveraged capital structure, such as
that used by the Fund.
The Fund intends to invest primarily in long-term New Jersey Municipal
Bonds and Municipal Bonds with a maturity of more than ten years. Also, the Fund
may invest in intermediate-term New Jersey Municipal Bonds and Municipal Bonds
with a maturity of between three years and ten years. The Fund may invest in
short-term, tax-exempt securities, short-term U.S. Government securities,
repurchase agreements or cash. Such short-term securities or cash will not
exceed 20% of its total assets except during interim periods pending investment
of the net proceeds of public offerings of the Fund's securities or in
anticipation of the repurchase or redemption of the Fund's securities and
temporary periods when, in the opinion of the Investment Adviser, prevailing
market or economic conditions warrant. The Fund does not ordinarily intend to
realize significant interest income that is subject to Federal income tax and
New Jersey personal income taxes. For a more complete description of New Jersey
Municipal Bonds and Municipal Bonds, see "Investment Objectives and Policies" in
the statement of additional information.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the proportion
of its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund for special tax
treatment afforded regulated investment companies under the Federal tax laws.
See "Taxes" herein and in the statement of additional information. To qualify,
among other requirements, the Fund will limit its investments so that, at the
close of each quarter of the taxable year, (i) not more than 25% of the market
value of the Fund's total assets will be invested in the securities (other than
U.S. Government securities) of a single issuer, and (ii) with respect to 50% of
the market value
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of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities (other than U.S. Government securities) of a
single issuer. A fund that elects to be classified as "diversified" under the
1940 Act must satisfy the foregoing 5% requirement with respect to 75% of its
total assets. To the extent that the Fund assumes large positions in the
securities of a small number of issuers, the Fund's yield may fluctuate to a
greater extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
PORTFOLIO INSURANCE
Under normal circumstances, at least 80% of the Fund's assets will be
invested in New Jersey Municipal Bonds and Municipal Bonds either (i) insured
under an insurance policy purchased by the Fund or (ii) insured under an
insurance policy obtained by the issuer thereof or any other party. The Fund
will seek to limit its investments to municipal obligations insured under
insurance policies issued by insurance carriers that have total admitted assets
(unaudited) of at least $75,000,000 and capital and surplus (unaudited) of at
least $50,000,000 and insurance claims-paying ability ratings of AAA from S&P or
Fitch or Aaa from Moody's. There can be no assurance that insurance from
insurance carriers meeting these criteria will be available. See Appendix C to
the statement of additional information for a brief description of S&P's,
Fitch's and Moody's insurance claims-paying ability ratings. Currently, it is
anticipated that a majority of the insured New Jersey Municipal Bonds and
Municipal Bonds in the Fund's portfolio will be insured by the following
insurance companies that satisfy the foregoing criteria: AMBAC Indemnity
Corporation, Financial Guaranty Insurance Company, Financial Security Assurance
and Municipal Bond Investors Assurance Corporation. The Fund also may purchase
New Jersey Municipal Bonds and Municipal Bonds covered by insurance issued by
any other insurance company that satisfies the foregoing criteria. It is
anticipated that initially a majority of insured New Jersey Municipal Bonds and
Municipal Bonds held by the Fund will be insured under policies obtained by
parties other than the Fund.
The Fund may purchase, but has no obligation to purchase, separate
insurance policies (the "Policies") from insurance companies meeting the
criteria set forth above that guarantee the payment of principal and interest on
specified eligible New Jersey Municipal Bonds and Municipal Bonds purchased by
the Fund. A New Jersey Municipal Bond or a Municipal Bond will be eligible for
coverage if it meets certain requirements of the insurance company set forth in
a Policy. In the event interest or principal on an insured New Jersey Municipal
Bond or Municipal Bond is not paid when due, the insurer will be obligated under
its Policy to make such payment not later than 30 days after it has been
notified by, and provided with documentation from, the Fund that such nonpayment
has occurred.
The Policies will be effective only as to insured New Jersey Municipal
Bonds and Municipal Bonds beneficially owned by the Fund. In the event of a sale
of any New Jersey Municipal Bonds and Municipal Bonds held by the Fund, the
issuer of the relevant Policy will be liable only for those payments of interest
and principal that are then due and owing. The Policies will not guarantee the
market value of the insured New Jersey Municipal Bonds and Municipal Bonds or
the value of the shares of the Fund.
The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities remain
in the Fund's portfolio. In addition, the insurer may not cancel its Policies
for any reason except failure to pay premiums when due. The
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Board of Directors of the Fund will reserve the right to terminate any of the
Policies if it determines that the benefits to the Fund of having its portfolio
insured under such policy are not justified by the expense involved.
The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently ranges from approximately
.02 of 1% to .15 of 1% of the principal amount of the New Jersey Municipal Bonds
and Municipal Bonds covered by such Policies. The estimate is based on the
expected composition of the Fund's portfolio of New Jersey Municipal Bonds and
Municipal Bonds. In instances in which the Fund purchases New Jersey Municipal
Bonds and Municipal Bonds insured under policies obtained by parties other than
the Fund, the Fund does not pay the premiums for such policies; rather, the cost
of such policies may be reflected in the purchase price of the New Jersey
Municipal Bonds and Municipal Bonds.
It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place a
value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities which are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternative value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser will be unable to
manage the portfolio to the extent it holds defaulted securities, which may
limit its ability in certain circumstances to purchase other New Jersey
Municipal Bonds and Municipal Bonds. See "Net Asset Value" in the statement of
additional information for a more complete description of the Fund's method of
valuing defaulted securities and securities that have a significant risk of
default.
There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Directors determines that such
insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may modify the criteria for insurance carriers or
the terms of the insurance, or may discontinue its policy of maintaining
insurance for all or any of the New Jersey Municipal Bonds and Municipal Bonds
held in the Fund's portfolio. Although the Investment Adviser periodically
reviews the financial condition of each insurer, there can be no assurance that
the insurers will be able to honor their obligations under the circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured New Jersey Municipal Bonds or
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured New Jersey Municipal Bonds or Municipal Bonds
are subject to market risk (i.e., fluctuations in market value as a result of
changes in prevailing interest rates and other market conditions).
SPECIAL CONSIDERATIONS RELATING TO NEW JERSEY MUNICIPAL BONDS
The Fund ordinarily will invest at least 80% of its total assets in New
Jersey Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of New Jersey Municipal Bonds than is a municipal
bond mutual fund that is not concentrated in issuers of New Jersey Municipal
Bonds to this degree. The Investment Adviser does not believe that the current
economic conditions in New Jersey will have a significant adverse effect on the
Fund's ability to invest in high
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quality New Jersey Municipal Bonds. As of the date of this prospectus, New
Jersey general obligation bonds are rated AA+ by S&P, Aa1 by Moody's and AA+ by
Fitch. No assurance can be given that such rating will not be lowered in the
future. For a discussion of economic and other conditions in the State of New
Jersey, see Appendix A, "Economic and Other Conditions in New Jersey" in the
statement of additional information.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5%
of the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to
33 1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own common stock pursuant to tender offers or
otherwise to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known, as
with the issuance of preferred stock, as "leveraging") create an opportunity for
greater total return since the Fund will not be required to sell portfolio
securities to repurchase or redeem shares but, at the same time, increase
exposure to capital risk. In addition, borrowed funds are subject to interest
costs that may offset or exceed the return earned on the borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell New Jersey Municipal Bonds and Municipal Bonds on a delayed
delivery basis or on a when-issued basis at fixed purchase or sale terms. These
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future. The purchase will be recorded
on the date the Fund enters into the commitment, and the value of the obligation
will thereafter be reflected in the calculation of the Fund's net asset value.
The value of the obligation on the delivery day may be more or less than its
purchase price. A separate account of the Fund will be established with its
custodian consisting of cash, cash equivalents or liquid securities having a
market value at all times at least equal to the amount of the commitment.
Indexed and Inverse Floating Obligations. The Fund may invest in New
Jersey Municipal Bonds and Municipal Bonds yielding a return based on a
particular index of value or interest rates. For example, the Fund may invest in
New Jersey Municipal Bonds and Municipal Bonds that pay interest based on an
index of Municipal Bond interest rates. The principal amount payable upon
maturity of certain New Jersey Municipal Bonds and Municipal Bonds also may be
based on the value of an index. To the extent the Fund invests in these types of
Municipal Bonds, the Fund's return on such New Jersey Municipal Bonds and
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Also, the Fund may invest in so-called "inverse floating
obligations" or "residual interest bonds" on which the interest rates typically
vary inversely with a short-term floating rate (which may be reset periodically
by a dutch auction, a remarketing agent, or by reference to a short-term
tax-exempt interest rate index). The Fund may purchase in the secondary market
synthetically-created inverse floating rate bonds evidenced by custodial or
trust receipts. Generally, income on inverse floating rate bonds will decrease
when short-term interest rates increase, and will increase when short-term
interest rates decrease. Such securities have the effect of providing a degree
of investment leverage, since they may increase or decrease in value in response
to changes, as an illustration, in market interest rates at a rate that is a
multiple (typically two) of
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the rate at which fixed-rate, long-term, tax-exempt securities increase or
decrease in response to such changes. As a result, the market values of such
securities generally will be more volatile than the market values of fixed-rate
tax-exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter-term maturities or
limitations on the extent to which the interest rate may vary. The Investment
Adviser believes that indexed and inverse floating obligations represent a
flexible portfolio management instrument for the Fund that allows the Investment
Adviser to vary the degree of investment leverage relatively efficiently under
different market conditions.
Call Rights. The Fund may purchase a New Jersey Municipal Bond or
Municipal Bond issuer's right to call all or a portion of such New Jersey
Municipal Bond or Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a mandatory
tender for the purchase of related New Jersey Municipal Bonds or Municipal
Bonds, subject to certain conditions. A Call Right that is not exercised prior
to the maturity of the related New Jersey Municipal Bond or Municipal Bond will
expire without value. The economic effect of holding both the Call Right and the
related New Jersey Municipal Bond or Municipal Bond is identical to holding a
New Jersey Municipal Bond or Municipal Bond as a non-callable security.
Repurchase Agreements. The Fund may invest in New Jersey Municipal Bonds,
Municipal Bonds and U.S. Government securities pursuant to repurchase
agreements. Repurchase agreements may be entered into only with a member bank of
the Federal Reserve System or a primary dealer in U.S. Government securities or
an affiliate thereof. Under such agreements, the seller agrees, upon entering
into the contract, to repurchase the security at a mutually agreed-upon time and
price, thereby determining the yield during the term of the agreement. The Fund
may not invest in repurchase agreements maturing in more than seven days if such
investments, together with all other illiquid investments, would exceed 15% of
the Fund's net assets. In the event of default by the seller under a repurchase
agreement, the Fund may suffer time delays and incur costs or possible losses in
connection with the disposition of the underlying securities.
In general, for Federal and New Jersey income tax purposes, repurchase
agreements are treated as collateralized loans secured by the securities "sold."
Therefore, amounts earned under such agreements will not be considered
tax-exempt interest.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts and options thereon. While the Fund's use of hedging
strategies is intended to reduce the volatility of the net asset value of the
common stock, the net asset value of the common stock will fluctuate. There can
be no assurance that the Fund's hedging transactions will be effective. For so
long as the AMPS are rated by Moody's and S&P, the Fund's use of options and
financial futures contracts will be subject to the limitations described under
"Rating Agency Guidelines" herein and in the statement of additional
information. Furthermore, the Fund may only engage in hedging activities from
time to time and may not necessarily be engaging in hedging activities when
movements in interest rates occur. The Fund has no obligation to enter into
hedging transactions and may not do so.
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<PAGE> 16
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or, in
certain circumstances, as long-term capital gains to shareholders. See
"Taxes -- Tax Treatment of Options and Futures Transactions" in the statement of
additional information. In addition, in order to obtain ratings of the preferred
stock from one or more nationally recognized statistical rating organizations
("NRSROs"), the Fund may be required to limit its use of hedging techniques in
accordance with the specified guidelines of such rating organizations.
For a description of the options and futures transactions in which the Fund
may engage, limitations on the Fund's use of such transactions and risks
associated with these transactions, see "Investment Objective and
Policies -- Options and Futures Transactions" in the statement of additional
information. The investment policies with respect to the hedging transactions of
the Fund are not fundamental policies and may be modified by the Board of
Directors of the Fund without the approval of the Fund's shareholders.
DESCRIPTION OF AMPS
GENERAL
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the back of this prospectus.
The AMPS of each series will be shares of preferred stock that entitle
their holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that may
vary for the successive Dividend Periods for each series. After the Initial
Dividend Period, each Subsequent Dividend Period for each series of AMPS
generally will be a 7-Day Dividend Period; provided, however, that prior to any
Auction, the Fund may elect, subject to certain limitations described herein,
upon giving notice to holders thereof, a Special Dividend Period. The Applicable
Rate for a particular Dividend Period will be determined by an Auction conducted
on the Business Day before the start of such Dividend Period. Beneficial Owners
and Potential Beneficial Owners of shares of AMPS may participate in Auctions
therefor, although, except in the case of a Special Dividend Period, Beneficial
Owners desiring to continue to hold all of their shares of AMPS regardless of
the Applicable Rate resulting from Auctions need not participate. For an
explanation of Auctions and the method of determining the Applicable Rate, see
"The Auction" herein and in the statement of additional information.
The following is a brief description of the terms of the shares of AMPS.
This description does not purport to be complete and is subject to and qualified
in its entirety by reference to the Fund's Articles of Incorporation and
Articles Supplementary, including the provisions thereof establishing the AMPS.
The Fund's Articles of Incorporation and the form of Articles Supplementary
establishing the terms of the AMPS have been filed as exhibits to the
Registration Statement of which this prospectus is a part.
DIVIDENDS
General. The holders of shares of each series of AMPS will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund, out of
funds legally available therefor, cumulative cash dividends on their shares, at
the Applicable Rate determined as set forth below
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<PAGE> 17
under "Determination of Dividend Rate," payable on the respective dates set
forth below. Dividends on the shares of AMPS so declared and payable shall be
paid (i) in preference to and in priority over any dividends so declared and
payable on the Common Stock, and (ii) to the extent permitted under the Code and
to the extent available, out of net tax-exempt income earned on the Fund's
investments. Generally, dividends on shares of AMPS, to the extent that they are
derived from interest paid on Municipal Bonds, will be exempt from Federal
income taxes, subject to possible application of the alternative minimum tax.
See "Taxes" in the statement of additional information.
Dividends on the shares of AMPS will accumulate from the date on which the
Fund originally issues the shares of AMPS (the "Date of Original Issue") and
will be payable on each series of AMPS on the dates described below. Dividends
on shares of each series of AMPS with respect to the Initial Dividend Period
shall be payable on the Initial Dividend Payment Date with respect to each
series of AMPS. Following the Initial Dividend Payment Date for each series of
AMPS, dividends on each series of AMPS will be payable, at the option of the
Fund, either (i) with respect to any 7-Day Dividend Period and any Short Term
Dividend Period of 35 or fewer days, on the day next succeeding the last day
thereof or (ii) with respect to any Short Term Dividend Period of more than 35
days and with respect to any Long Term Dividend Period, monthly on the first
Business Day of each calendar month during such Short Term Dividend Period or
Long Term Dividend Period and on the day next succeeding the last day thereof
(each such date referred to in clause (i) or (ii) being referred to herein as a
"Normal Dividend Payment Date"), except that if such Normal Dividend Payment
Date is not a Business Day, the Dividend Payment Date shall be the first
Business Day next succeeding such Normal Dividend Payment Date. Thus, following
the Initial Dividend Payment Date for each series of AMPS, dividends generally
will be payable (in the case of Dividend Periods which are not Special Dividend
Periods) on each succeeding in the case of Series A AMPS and on each
succeeding in the case of Series B AMPS. Although any particular
Dividend Payment Date may not occur on the originally scheduled date because of
the exceptions discussed above, the next succeeding Dividend Payment Date,
subject to such exceptions, will occur on the next following originally
scheduled date. If for any reason a Dividend Payment Date cannot be fixed as
described above, then the Board of Directors shall fix the Dividend Payment
Date. The Board of Directors by resolution prior to authorization of a dividend
by the Board of Directors may change a Dividend Payment Date if such change does
not adversely affect the contract rights of the holders of shares of AMPS set
forth in the Charter. The Initial Dividend Period, 7-Day Dividend Periods and
Special Dividend Periods are hereinafter sometimes referred to as "Dividend
Periods." Each dividend payment date determined as provided above is hereinafter
referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, the Fund is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
Fund does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the AMPS, which holder
is expected to be the nominee of the Securities Depository. See "The
Auction -- Securities Depository." The Securities Depository will credit the
accounts of the Agent Members of the Existing Holders in accordance with the
Securities Depository's normal procedures which provide for payment in same-day
funds. The Agent Member of an Existing Holder will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
Existing Holder in accordance with
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the instructions of such Existing Holder. Dividends in arrears for any past
Dividend Period may be declared and paid at any time, without reference to any
regular Dividend Payment Date, to the nominee of the Securities Depository. Any
dividend payment made on shares of AMPS first shall be credited against the
earliest declared but unpaid dividends accumulated with respect to such series.
Holders of shares of AMPS will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends
except as described under "Additional Dividends" and "Non-Payment Period; Late
Charge." No interest will be payable in respect of any dividend payment or
payments on the shares of AMPS which may be in arrears.
The amount of cash dividends per share of any series of AMPS payable (if
declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period and
each Dividend Payment Date of each Short Term Dividend Period shall be computed
by multiplying the Applicable Rate for such Dividend Period by a fraction, the
numerator of which will be the number of days in such Dividend Period or part
thereof that such share was outstanding and for which dividends are payable on
such Dividend Payment Date and the denominator of which will be 365, multiplying
the amount so obtained by $25,000, and rounding the amount so obtained to the
nearest cent. During any Long Term Dividend Period, the amount of cash dividends
per share of AMPS payable (if declared) on any Dividend Payment Date shall be
computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be such number of days in such part of
such Dividend Period that such share was outstanding and for which dividends are
payable on such Dividend Payment Date and the denominator of which will be 360,
multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent.
Notification of Dividend Period. With respect to each Dividend Period that
is a Special Dividend Period, the Fund, at its sole option and to the extent
permitted by law, by telephonic and written notice (a "Request for Special
Dividend Period") to the Auction Agent and to each Broker-Dealer, may request
that the next succeeding Dividend Period for a series of AMPS will be a number
of days (other than seven), evenly divisible by seven, and not fewer than seven
nor more than 364 in the case of a Short Term Dividend Period or one whole year
or more but not greater than five years in the case of a Long Term Dividend
Period, specified in such notice, provided that the Fund may not give a Request
for Special Dividend Period (and any such request shall be null and void)
unless, for any Auction occurring after the initial Auction, Sufficient Clearing
Bids were made in the last occurring Auction and unless full cumulative
dividends, any amounts due with respect to redemptions, and any Additional
Dividends payable prior to such date have been paid in full. Such Request for
Special Dividend Period, in the case of a Short Term Dividend Period, shall be
given on or prior to the second Business Day but not more than seven Business
Days prior to an Auction Date for the AMPS and, in the case of a Long Term
Dividend Period, shall be given on or prior to the second Business Day but not
more than 28 days prior to an Auction Date for the AMPS. Upon receiving such
Request for Special Dividend Period, the Broker-Dealers jointly shall determine
whether, given the factors set forth below, it is advisable that the Fund issue
a Notice of Special Dividend Period for a series of AMPS as contemplated by such
Request for Special Dividend Period and the Optional Redemption Price of the
AMPS during such Special Dividend Period and the Specific Redemption Provisions
and shall give the Fund and the Auction Agent written notice (a "Response") of
such determination by no later than the second Business Day prior to such
Auction Date. In the event the Response indicates that it is advisable that the
Fund give a
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notice of a Special Dividend Period for the AMPS, the Fund, by no later than the
second Business Day prior to such Auction Date may give a notice (a "Notice of
Special Dividend Period") to the Auction Agent, the Securities Depository and
each Broker-Dealer. See "Description of AMPS -- Dividends -- Notification of
Dividend Period" in the statement of additional information for a detailed
description of these procedures.
Determination of Dividend Rate. The dividend rate on shares of each series
of AMPS during the period from and including the Date of Original Issue for each
series of AMPS to but excluding the Initial Dividend Payment Date for each
series of AMPS (the "Initial Dividend Period") will be the rate per annum set
forth above under "Offering Summary." Commencing on the Initial Dividend Payment
Date for each series of AMPS, the Applicable Rate on the shares of such series
of AMPS for each Subsequent Dividend Period, which Subsequent Dividend Period
shall be a period commencing on and including a Dividend Payment Date and ending
on and including the calendar day prior to the next Dividend Payment Date (or
last Dividend Payment Date in a Dividend Period if there is more than one
Dividend Payment Date), shall be equal to the rate per annum that results from
the Auction with respect to such Subsequent Dividend Period. The Initial
Dividend Period and Subsequent Dividend Period for each series of AMPS is
referred to herein as a "Dividend Period." Cash dividends shall be calculated as
set forth above under "Dividends -- General."
Restrictions on Dividends and Other Payments. Under the 1940 Act, the Fund
may not declare dividends or make other distributions on shares of Common Stock
or purchase any such shares if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage (as
defined in the 1940 Act) with respect to the outstanding shares of AMPS would be
less than 200% (or such other percentage as in the future may be required by
law). The Fund estimates that, based on the composition of its portfolio at
, 1999, asset coverage with respect to shares of AMPS would be
approximately % immediately after the issuance of the shares of AMPS
offered hereby. Under the Code, the Fund, among other things, must distribute at
least 90% of its investment company taxable income each year in order to
maintain its qualification for tax treatment as a regulated investment company.
The foregoing limitations on dividends, distributions and purchases under
certain circumstances may impair the Fund's ability to maintain such
qualification. See "Taxes" in the statement of additional information.
Upon any failure to pay dividends on shares of AMPS for two years or more,
the holders of the shares of AMPS will acquire certain additional voting rights.
See "Voting Rights" below. Such rights shall be the exclusive remedy of the
holders of shares of AMPS upon any failure to pay dividends on shares of the
Fund.
Additional Dividends. If the Fund retroactively allocates any net capital
gains or other income subject to regular Federal income taxes to shares of AMPS
without having given advance notice thereof to the Auction Agent as described
under "The Auction -- Auction Date; Advance Notice of Allocation of Taxable
Income; Inclusion of Taxable Income in Dividends" below, which may only happen
when such allocation is made as a result of the redemption of all or a portion
of the outstanding shares of AMPS or the liquidation of the Fund (the amount of
such allocation referred to herein as a "Retroactive Taxable Allocation"), the
Fund, within 90 days (and generally within 60 days) after the end of the Fund's
fiscal year for which a Retroactive Taxable Allocation is made, will provide
notice thereof to the Auction Agent and to each holder of shares (initially Cede
as
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nominee of the Securities Depository) during such fiscal year at such holder's
address as the same appears or last appeared on the stock books of the Fund. The
Fund, within 30 days after such notice is given to the Auction Agent, will pay
to the Auction Agent (who then will distribute to such holders of shares of
AMPS), out of funds legally available therefor, an amount equal to the aggregate
Additional Dividend (as defined below) with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question. See "Taxes"
in the statement of additional information.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate amount
of Retroactive Taxable Allocations made to such holder with respect to the
fiscal year in question, would cause such holder's dividends in dollars (after
Federal and New Jersey income tax consequences) from the aggregate of both the
Retroactive Taxable Allocations and the Additional Dividend to be equal to the
dollar amount of the dividends which would have been received by such holder if
the amount of the aggregate Retroactive Taxable Allocations had been excludable
from the gross income of such holder. Such Additional Dividend shall be
calculated (i) without consideration being given to the time value of money;
(ii) assuming that no holder of shares of AMPS is subject to the Federal
alternative minimum tax with respect to dividends received from the Fund; and
(iii) assuming that each Retroactive Taxable Allocation would be taxable in the
hands of each holder of shares of AMPS at the greater of: (a) the maximum
combined marginal regular Federal and New Jersey individual income tax rate
applicable to ordinary income or capital gains depending on the taxable
character of the distribution (including any surtax); or (b) the maximum
combined marginal regular Federal and New Jersey corporate income tax rate
applicable to ordinary income or capital gains depending on the taxable
character of the distribution (taking into account in both (a) and (b) the
Federal income tax deductibility of state taxes paid or incurred but not any
phase out of, or provision limiting, personal exemptions, itemized deductions,
or the benefit of lower tax brackets and assuming the taxability of Federally
tax-exempt dividends to corporations for New Jersey state income tax purposes).
Although the Fund generally intends to designate any Additional Dividend as an
exempt-interest dividend to the extent permitted by applicable law, it is
possible that all or a portion of any Additional Dividend will be taxable to the
recipient thereof. See "Taxes -- Tax Treatment of Additional Dividends" in the
statement of additional information. The Fund will not pay a further Additional
Dividend with respect to any taxable portion of an Additional Dividend.
If the Fund does not give advance notice of the amount of taxable income to
be included in a dividend on shares of AMPS in the related Auction, the Fund may
include such taxable income in a dividend on shares of AMPS if it increases the
dividend by an additional amount calculated as if such income were a Retroactive
Taxable Allocation and the additional amount were an Additional Dividend and
notifies the Auction Agent of such inclusion at least five days prior to the
applicable Dividend Payment Date. See "The Auction -- Auction
Procedures -- Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends" below.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
19
<PAGE> 21
1940 Act AMPS Asset Coverage. The Fund will be required under the Articles
Supplementary to maintain, with respect to shares of AMPS, as of the last
Business Day of each month in which any shares of AMPS are outstanding, asset
coverage of at least 200% with respect to senior securities which are stock,
including the shares of AMPS (or such other asset coverage as in the future may
be specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are stock of a closed-end investment company as a condition of
paying dividends on its common stock) ("1940 Act AMPS Asset Coverage"). If the
Fund fails to maintain 1940 Act AMPS Asset Coverage and such failure is not
cured as of the last Business Day of the following month (the "1940 Act Cure
Date"), the Fund will be required under certain circumstances to redeem certain
of the shares of AMPS. See "Redemption" below.
The 1940 Act AMPS Asset Coverage immediately following the issuance of AMPS
offered hereby (after giving effect to the deduction of the sales load and
offering expenses for the shares of AMPS) will be computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Fund assets less
liabilities not
constituting
senior securities
- ------------------------- = $ = %
------------
Senior securities $
representing indebtedness
plus liquidation value of
the shares of AMPS
</TABLE>
AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding,
the Fund will be required under the Articles Supplementary to maintain as of
each Business Day (a "Valuation Date") S&P Eligible Assets and Moody's Eligible
Assets each having in the aggregate a Discounted Value at least equal to the
AMPS Basic Maintenance Amount. The AMPS Basic Maintenance Amount includes the
sum of (i) the aggregate liquidation value of AMPS then outstanding and (ii)
certain accrued and projected payment obligations of the Fund. See "Description
of AMPS -- Asset Maintenance -- AMPS Basic Maintenance Amount" in the statement
of additional information. If the Fund fails to meet such requirement as of any
Valuation Date and such failure is not cured on or before the sixth Business Day
after such Valuation Date (the "AMPS Basic Maintenance Cure Date"), the Fund
will be required under certain circumstances to redeem certain of the shares of
AMPS. Upon any failure to maintain the required Discounted Value, the Fund will
use its best efforts to alter the composition of its portfolio to reattain a
Discounted Value at least equal to the AMPS Basic Maintenance Amount on or prior
to the AMPS Basic Maintenance Cure Date. See "Redemption" herein and in the
statement of additional information.
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and under
Maryland law, upon giving a Notice of Redemption, as provided in the statement
of additional information, the Fund, at its option, may redeem shares of AMPS of
any series, in whole or in part, out of funds legally available therefor, at the
Optional Redemption Price per share on any Dividend Payment Date; provided that
no share of AMPS may be redeemed at the option of the Fund during (a) the
Initial Dividend Period with respect to a series of shares or (b) a Non-Call
Period to which such
20
<PAGE> 22
share is subject. "Optional Redemption Price" means $25,000 per share of AMPS
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared) to the date fixed for redemption plus any applicable redemption
premium, if any, attributable to the designation of a Premium Call Period. In
addition, holders of AMPS may be entitled to receive Additional Dividends in the
event of redemption of such AMPS to the extent provided herein. See
"Dividends -- Additional Dividends" above. The Fund has the authority to redeem
the AMPS for any reason and may redeem all or part of the outstanding shares of
AMPS if it anticipates that the Fund's leveraged capital structure will result
in a lower rate of return to holders of common stock for any significant period
of time than that obtainable if the Common Stock were unleveraged.
Mandatory Redemption. The Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share, shares
of AMPS to the extent permitted under the 1940 Act and Maryland law, on a date
fixed by the Board of Directors, if the Fund fails to maintain S&P Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value equal
to or greater than the AMPS Basic Maintenance Amount or to satisfy the 1940 Act
AMPS Asset Coverage and such failure is not cured on or before the AMPS Basic
Maintenance Cure Date or the 1940 Act Cure Date (herein collectively referred to
as a "Cure Date"), as the case may be. "Mandatory Redemption Price" means
$25,000 per share of AMPS plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption.
In addition, holders of AMPS may be entitled to receive Additional Dividends in
the event of redemption of such AMPS to the extent provided herein. See
"Dividends -- Additional Dividends" above.
For a discussion of the allocation procedures to be used if fewer than all
of the outstanding AMPS are to be redeemed and for a discussion of other
redemption procedures, see "Description of AMPS -- Redemption" in the statement
of additional information.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of shares of all series of AMPS will be
entitled to receive, out of the assets of the Fund available for distribution to
shareholders, before any distribution or payment is made upon any shares of
common stock or any other capital stock of the Fund ranking junior in right of
payment upon liquidation of AMPS, $25,000 per share together with the amount of
any dividends accumulated but unpaid (whether or not earned or declared) thereon
to the date of distribution, and after such payment the holders of AMPS will be
entitled to no other payments except for any Additional Dividends. If such
assets of the Fund shall be insufficient to make the full liquidation payment on
each outstanding series of AMPS and liquidation payments on any other
outstanding class or series of preferred stock of the Fund ranking on a parity
with the AMPS as to payment upon liquidation, then such assets will be
distributed among the holders of each such series of AMPS and the holders of
shares of such other class or series ratably in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of liquidation distribution to which they are entitled, the holders of
AMPS will not be entitled to any further participation in any distribution of
assets by the Fund except for any Additional Dividends. A consolidation, merger
or share exchange of the Fund with or into any other entity or entities or a
sale, whether for cash, shares of
21
<PAGE> 23
stock, securities or properties, of all or substantially all or any part of the
assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
VOTING RIGHTS
Except as otherwise indicated in this prospectus and the statement of
additional information and except as otherwise required by applicable law,
holders of shares of AMPS will be entitled to one vote per share on each matter
submitted to a vote of stockholders and will vote together with holders of
shares of common stock as a single class.
The 1940 Act and the Articles Supplementary require that the holders of
preferred stock, including the AMPS, voting as a separate class, have the rights
to elect two of the Fund's Directors at all times and to elect a majority of the
Directors at any time that two full years' dividends on the AMPS are unpaid. The
holders of AMPS will vote as a separate class or classes on certain other
matters as required under the Articles Supplementary, the 1940 Act and Maryland
law. In addition, each series of AMPS may vote as a separate series under
certain circumstances. See "Description of AMPS -- Voting Rights" in the
statement of additional information.
THE AUCTION
GENERAL
Holders of the shares of AMPS of each series will be entitled to receive
cumulative cash dividends on their shares when, as and if declared by the Board
of Directors of the Fund, out of funds legally available therefor, on the
Initial Dividend Payment Date with respect to the Initial Dividend Period and,
thereafter, on each Dividend Payment Date with respect to a Subsequent Dividend
Period (generally a period of seven days subject to certain exceptions set forth
under "Description of AMPS -- Dividends -- General") at the rate per annum equal
to the Applicable Rate for each such Dividend Period.
The provisions of the Articles Supplementary establishing the terms of the
shares of AMPS offered hereby will provide that the Applicable Rate for each
series of AMPS for each Dividend Period after the Initial Dividend Period
therefor will be equal to the rate per annum that the Auction Agent advises has
resulted on the Business Day preceding the first day of such Dividend Period due
to implementation of the auction procedures set forth in the Articles
Supplementary (the "Auction Procedures") in which persons determine to hold or
offer to purchase or sell shares of AMPS of such series. The Auction Procedures
are attached as Appendix E to the statement of additional information.
Each periodic operation of such procedures with respect to the shares of
AMPS is referred to hereinafter as an "Auction." If, however, the Fund should
fail to pay or duly provide for the full amount of any dividend on shares of
AMPS of any series or the redemption price of shares of AMPS of such series
called for redemption, the Applicable Rate for shares of AMPS will be determined
as set forth under "Description of AMPS -- Dividends -- Non-Payment Period; Late
Charge" in the statement of additional information.
Auction Agent Agreement. The Fund will enter into an agreement (the
"Auction Agent Agreement") with IBJ Whitehall Bank & Trust Company (together
with any successor bank or trust company or other entity entering into a similar
agreement with this Fund, the "Auction Agent"),
22
<PAGE> 24
which provides, among other things, that the Auction Agent will follow the
Auction Procedures for the purpose of determining the Applicable Rate for the
AMPS. The Fund will pay the Auction Agent compensation for its services under
the Auction Agent Agreement.
Broker-Dealer Agreements. The Auction Agent will enter into agreements
with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Goldman, Sachs & Co., Lehman Government Securities Incorporated and Salomon
Smith Barney Inc. and may enter into similar agreements (collectively, the
"Broker-Dealer Agreements") with one or more other broker-dealers (collectively,
the "Broker-Dealers") selected by the Fund, which provide for the participation
of such Broker-Dealers in Auctions. Merrill Lynch is an affiliate of the
Investment Adviser in that they share a common parent, ML & Co.
Securities Depository. The Depository Trust Company initially will act as
the Securities Depository for the Agent Members with respect to the shares of
AMPS of each series. One or more registered certificates for all of the shares
of each series of AMPS initially will be registered in the name of Cede, as
nominee of the Securities Depository. The certificate will bear a legend to the
effect that such certificate is issued subject to the provisions restricting
transfers of shares of AMPS of the series to which it relates contained in the
Articles Supplementary. Cede initially will be the holder of record of all
shares of AMPS, and Beneficial Owners will not be entitled to receive
certificates representing their ownership interest in such shares. The
Securities Depository will maintain lists of its participants and will maintain
the positions (ownership interests) of shares of AMPS held by each Agent Member,
whether as the Beneficial Owner thereof for its own account or as nominee for
the Beneficial Owner thereof. Payments made by the Fund to holders of AMPS will
be duly made by making payments to the nominee of the Securities Depository.
AUCTION PROCEDURES
The following is a brief discussion of the procedures to be used in
conducting Auctions. Separate auctions will be conducted for each series of
AMPS. This summary is qualified by reference to the Auction Procedures set forth
in Appendix E to the statement of additional information. The Settlement
Procedures to be used with respect to Auctions are set forth in Appendix D to
the statement of additional information.
Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividends. An Auction to determine the Applicable Rate for
each series of AMPS offered hereby for each Dividend Period for such series
(other than the Initial Dividend Period therefor) will be held on the first
Business Day (as hereinafter defined) preceding the first day of such Dividend
Period, which first day is also the Dividend Payment Date for the preceding
Dividend Period (the date of each Auction being referred to herein as an
"Auction Date"). "Business Day" means a day on which the New York Stock Exchange
is open for trading and which is not a Saturday, Sunday or other day on which
banks in the City of New York are authorized or obligated by law to close.
Auctions for shares of Series A AMPS for Dividend Periods after the Initial
Dividend Period normally will be held every after the preceding Dividend
Payment Date, and each subsequent Dividend Period normally will begin on the
following (also a Dividend Payment Date). Auctions for shares of Series B
AMPS for Dividend Periods after the Initial Dividend Period normally will be
held every after the preceding Dividend Payment Date, and each subsequent
Dividend Period normally will begin on the following (also a Dividend
Payment Date). The
23
<PAGE> 25
Auction Date and the first day of the related Dividend Period (both of which
must be Business Days) need not be consecutive calendar days. For example, in
most cases, if the that normally would be an Auction Date for Series A
AMPS is not a Business Day, then such Auction Date will be the preceding
and the first day of the related Dividend Period will continue to be the
following . See "Description of AMPS -- Dividends" for information
concerning the circumstances under which a Dividend Payment Date may fall on a
date other than the days specified above, which may affect the Auction Date.
Except as noted below, whenever the Fund intends to include any net capital
gains or other income subject to regular Federal income taxes in any dividend on
shares of AMPS, the Fund will notify the Auction Agent of the amount to be so
included at least five Business Days prior to the Auction Date on which the
Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Fund, in turn it will notify each
Broker-Dealer, who, on or prior to such Auction Date, in accordance with its
Broker-Dealer Agreement, will notify its customers who are Beneficial Owners and
Potential Beneficial Owners believed to be interested in submitting an Order in
the Auction to be held on such Auction Date. The Fund also may include such
income in a dividend on shares of AMPS without giving advance notice thereof if
it increases the dividend by an additional amount calculated as if such income
were a Retroactive Taxable Allocation and the additional amount were an
Additional Dividend; provided that the Fund will notify the Auction Agent of the
additional amounts to be included in such dividend at least five Business Days
prior to the applicable Dividend Payment Date. See "Description of AMPS --
Dividends -- Additional Dividends" above.
Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders
and Potential Holders. On or prior to each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone a:
(i) Hold Order-indicating the number of outstanding shares, if any, of AMPS
that such Beneficial Owner desires to continue to hold without regard to the
Applicable Rate for the next Dividend Period for such shares;
(ii) Bid-indicating the number of outstanding shares, if any, of AMPS that
such Beneficial Owner desires to continue to hold, provided that the Applicable
Rate for the next Dividend Period for such shares is not less than the rate per
annum then specified by such Beneficial Owner; and/or
(iii) Sell Order-indicating the number of outstanding shares, if any, of
AMPS that such Beneficial Owner offers to sell without regard to the Applicable
Rate for the next Dividend Period for such shares; and
(b) Broker-Dealers will contact customers who are Potential Beneficial
Owners of shares of AMPS to determine whether such Potential Beneficial Owners
desire to submit Bids indicating the number of shares of AMPS which they offer
to purchase provided that the Applicable Rate for the next Dividend Period for
such shares is not less than the rates per annum specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner to a
Broker-Dealer and the communication by a Broker-Dealer, whether or not acting
for its own account, to the Auction Agent of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." A Beneficial
Owner or a Potential Beneficial Owner placing an Order, including a
24
<PAGE> 26
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted by
a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders with
respect to shares of AMPS then held by such Beneficial Owner, as well as Bids
for additional shares of AMPS. For information concerning the priority given to
different types of Orders placed by Beneficial Owners, see "Submission of Orders
by Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for shares of AMPS will be the Applicable
Percentage of the Reference Rate. The Auction Agent will round each applicable
Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent per
annum, with any such number ending in five ten-thousandths of one percent being
rounded upwards to the nearest one-thousandth (0.001) of one percent. The
Auction Agent will not round the applicable Reference Rate as part of its
calculation of the Maximum Applicable Rate.
The Maximum Applicable Rate for shares of AMPS will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both shall
not make such rating available, the equivalent of either or both of such ratings
by a Substitute Rating Agency or two Substitute Rating Agencies or, in the event
that only one such rating shall be available, such rating) and (ii) whether the
Fund has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net capital gains or
other taxable income will be included in such dividend on shares of AMPS as
follows:
<TABLE>
<CAPTION>
CREDIT RATINGS
- ---------------------------------------------------- APPLICABLE APPLICABLE
REFERENCE RATE -- PERCENTAGE OF PERCENTAGE OF
REFERENCE RATE -- NO NOTIFICATION NOTIFICATION MOODY'S S&P
- --------------------------------- ----------------- ------------- -------------
<S> <C> <C> <C>
"aa3" or higher AA- or Higher 110% 150%
"a3" or "a1" A- to A 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend Period.
The Fund will take all reasonable action necessary to enable S&P and
Moody's to provide a rating for the AMPS. If either S&P or Moody's, or both,
shall not make such a rating available, the Underwriter or its affiliates and
successors, after consultation with the Fund, will select another nationally
recognized statistical rating organization (a "Substitute Rating Agency") or two
other nationally recognized statistical rating organizations ("Substitute Rating
Agencies") to act as a Substitute Rating Agency or Substitute Rating Agencies,
as the case may be.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares."
25
<PAGE> 27
Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing.
A Broker-Dealer also may hold AMPS in its own account as a Beneficial
Owner. A Broker-Dealer thus may submit Orders to the Auction Agent as a
Beneficial Owner or a Potential Beneficial Owner and therefore participate in an
Auction as an Existing Holder or Potential Holder on behalf of both itself and
its customers. Any Order placed with the Auction Agent by a Broker-Dealer as or
on behalf of a Beneficial Owner or a Potential Beneficial Owner will be treated
in the same manner as an Order placed with a Broker-Dealer by a Beneficial Owner
or a Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to
submit to the Auction Agent an Order in respect of any AMPS held by it or its
customers who are Beneficial Owners will be treated in the same manner as a
Beneficial Owner's failure to submit to its Broker-Dealer an Order in respect of
AMPS held by it, as described in the next paragraph. Inasmuch as a Broker-Dealer
participates in an Auction as an Existing Holder or a Potential Holder only to
represent the interests of a Beneficial Owner or Potential Beneficial Owner,
whether it be its customers or itself, all discussion herein relating to the
consequences of an Auction for Existing Holders and Potential Holders also
applies to the underlying beneficial ownership interests represented thereby.
For information concerning the priority given to different types of Orders
placed by Existing Holders, see "Submission of Orders by Broker-Dealers to
Auction Agent." Each purchase or sale in an Auction will be settled on the
Business Day next succeeding the Auction Date at a price per share equal to
$25,000. See "Notification of Results; Settlement" below.
If one or more Orders covering in the aggregate all of the outstanding
shares of AMPS held by a Beneficial Owner are not submitted to the Auction Agent
prior to the Submission Deadline, either because a Broker-Dealer failed to
contact such Beneficial Owner or otherwise, the Auction Agent shall deem a Hold
Order (in the case of an Auction relating to a Dividend Period which is not a
Special Dividend Period of 28 days or more) and a Sell Order (in the case of an
Auction relating to a Special Dividend Period of 28 days or more) to have been
submitted on behalf of such Beneficial Owner covering the number of outstanding
shares of AMPS held by such Beneficial Owner and not subject to Orders submitted
to the Auction Agent.
If all of the outstanding shares of AMPS are subject to Submitted Hold
Orders, the Dividend Period next succeeding the Auction automatically shall be
the same length as the immediately preceding Dividend Period, and the Applicable
Rate for the next Dividend Period for all shares of AMPS will be 40% of the
Reference Rate on the date of the applicable Auction (or 60% of such rate if the
Fund has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net capital gains or
other taxable income will be included in such dividend on shares of AMPS).
For the purposes of an Auction, shares of AMPS for which the Fund shall
have given notice of redemption and deposited moneys therefor with the Auction
Agent in trust or segregated in an account at the Fund's custodian bank for the
benefit of the Auction Agent, as set forth under "Description of
AMPS-Redemption" in the statement of additional information, will not be
considered as outstanding and will not be included in such Auction. Pursuant to
the Articles Supplementary of the Fund, the Fund will be prohibited from
reissuing and its affiliates (other than the Underwriter) will be prohibited
from transferring (other than to the Fund) any shares of AMPS
26
<PAGE> 28
they may acquire. Neither the Fund nor any affiliate of the Fund (other than the
Underwriter) may submit an Order in any Auction, except that an affiliate of the
Fund that is a Broker-Dealer may submit an Order.
Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00
p.m., Eastern time, on each Auction Date, or such other time on the Auction Date
as may be specified by the Auction Agent (the "Submission Deadline"), each
Broker-Dealer will submit to the Auction Agent in writing all Orders obtained by
it for the Auction to be conducted on such Auction Date, designating itself
(unless otherwise permitted by the Fund) as the Existing Holder or Potential
Holder in respect of the shares of AMPS subject to such Orders. Any Order
submitted by a Beneficial Owner or a Potential Beneficial Owner to its
Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the
Submission Deadline on any Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent will round such rate per
annum up to the next highest one-thousandth (.001) of 1%.
If one or more Orders of an Existing Holder are submitted to the Auction
Agent and such Orders cover in the aggregate more than the number of outstanding
shares of AMPS held by such Existing Holder, such Orders will be considered
valid in the following order of priority:
(i) any Hold Order will be considered valid up to and including the number
of outstanding shares of AMPS held by such Existing Holder, provided that if
more than one Hold Order is submitted by such Existing Holder and the number of
shares of AMPS subject to such Hold Orders exceeds the number of outstanding
shares of AMPS held by such Existing Holder, the number of shares of AMPS
subject to each of such Hold Orders will be reduced pro rata so that such Hold
Orders, in the aggregate, will cover exactly the number of outstanding shares of
AMPS held by such Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of their
respective rates per annum if more than one Bid is submitted by such Existing
Holder, up to and including the excess of the number of outstanding shares of
AMPS held by such Existing Holder over the number of outstanding shares of AMPS
subject to any Hold Order referred to in clause (i) above (and if more than one
Bid submitted by such Existing Holder specifies the same rate per annum and
together they cover more than the remaining number of shares that can be the
subject of valid Bids after application of clause (i) above and of the foregoing
portion of this clause (ii) to any Bid or Bids specifying a lower rate or rates
per annum, the number of shares subject to each of such Bids will be reduced pro
rata so that such Bids, in the aggregate, cover exactly such remaining number of
outstanding shares); and the number of outstanding shares, if any, subject to
Bids not valid under this clause (ii) shall be treated as the subject of a Bid
by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the
excess of the number of outstanding shares of AMPS held by such Existing Holder
over the sum of the number of shares of AMPS subject to Hold Orders referred to
in clause (i) above and the number of shares of AMPS subject to valid Bids by
such Existing Holder referred to in clause (ii) above; provided that, if more
than one Sell Order is submitted by any Existing Holder and the number of shares
of AMPS subject to such Sell Orders is greater than such excess, the number of
shares of AMPS subject to each of
27
<PAGE> 29
such Sell Orders will be reduced pro rata so that such Sell Orders, in the
aggregate, will cover exactly the number of shares of AMPS equal to such excess.
If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of shares of AMPS therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate. Not earlier than the Submission Deadline for each Auction, the Auction
Agent will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding shares of AMPS over the number of outstanding shares of
AMPS subject to Submitted Hold Orders (such excess being referred to as the
"Available AMPS") and whether Sufficient Clearing Bids have been made in such
Auction. Sufficient Clearing Bids will have been made if the number of
outstanding shares of AMPS that are the subject of Submitted Bids of Potential
Holders with rates per annum not higher than the Maximum Applicable Rate equals
or exceeds the number of outstanding shares that are the subject of Submitted
Sell Orders (including the number of shares subject to Bids of Existing Holders
specifying rates per annum higher than the Maximum Applicable Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate per annum specified in the Submitted Bids (the
"Winning Bid Rate") which would result in the number of shares subject to
Submitted Bids specifying such rate per annum or a lower rate per annum being at
least equal to the Available AMPS. If Sufficient Clearing Bids have been made,
the Winning Bid Rate will be the Applicable Rate for the next Dividend Period
for all shares of AMPS then outstanding.
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders), the
Dividend Period next following the Auction automatically will be a 7-Day
Dividend Period, and the Applicable Rate for such Dividend Period will be equal
to the Maximum Applicable Rate. If Sufficient Clearing Bids have not been made,
Beneficial Owners that have Submitted Sell Orders will not be able to sell in
the Auction all, and may not be able to sell any, shares of AMPS subject to such
Submitted Sell Orders. See "Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares." Thus, under some circumstances,
Beneficial Owners may not have liquidity of investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Based on the determinations described under
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and subject to the discretion of the Auction Agent to round as described
below, Submitted Bids and Submitted Sell Orders will be accepted or rejected in
the order of priority set forth in the Auction Procedures with the result that
Existing Holders and Potential Holders of AMPS will sell, continue to hold
and/or purchase shares of AMPS as set forth below. Existing Holders that submit
or are deemed to have submitted Hold Orders will continue to hold the shares of
AMPS subject to such Hold Orders.
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<PAGE> 30
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a rate per
annum higher than the Winning Bid Rate or a Submitted Sell Order will sell the
outstanding shares of AMPS subject to such Submitted Bid or Submitted Sell
Order;
(b) each Existing Holder that placed a Submitted Bid specifying a rate per
annum lower than the Winning Bid Rate will continue to hold the outstanding
shares of AMPS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a rate per
annum lower than the Winning Bid Rate will purchase the number of shares of AMPS
subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a rate per
annum equal to the Winning Bid Rate will continue to hold the outstanding shares
of AMPS subject to such Submitted Bids, unless the number of outstanding shares
of AMPS subject to all such Submitted Bids of Existing Holders is greater than
the excess of the Available AMPS over the number of shares of AMPS accounted for
in clauses (b) and (c) above, in which event each Existing Holder with such a
Submitted Bid will sell a number of outstanding shares of AMPS determined on a
pro rata basis based on the number of outstanding shares of AMPS subject to all
such Submitted Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a rate per
annum equal to the Winning Bid Rate will purchase any Available AMPS not
accounted for in clause (b), (c) or (d) above on a pro rata basis based on the
shares of AMPS subject to all such Submitted Bids of Potential Holders.
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a rate per
annum equal to or lower than the Maximum Applicable Rate will continue to hold
the outstanding shares of AMPS subject to such Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a rate per
annum equal to or lower than the Maximum Applicable Rate will purchase the
number of shares of AMPS subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a rate per
annum higher than the Maximum Applicable Rate or a Submitted Sell Order will
sell a number of outstanding shares of AMPS determined on a pro rata basis based
on the outstanding shares of AMPS subject to all such Submitted Bids and
Submitted Sell Orders.
If as a result of the Auction Procedures described above any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of AMPS, the Auction
Agent, in such manner as, in its sole discretion, it shall determine, will round
up or down the number of shares of AMPS being sold or purchased on such Auction
Date so that each share sold or purchased by each Existing Holder or Potential
Holder will be a whole share of AMPS. If any Potential Holder would be entitled
or required to purchase less than a whole share of AMPS, the Auction Agent, in
such manner as, in its sole discretion, it shall determine, will
29
<PAGE> 31
allocate shares of AMPS for purchase among Potential Holders so that only whole
shares of AMPS are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS.
Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the Applicable
Rate for the next Dividend Period for the related shares of AMPS by telephone at
approximately 3:00 P.M., Eastern time, on the Auction Date for such Auction.
Each such Broker-Dealer that submitted an Order for the account of a customer
then will advise such customer whether such Bid or Sell Order was accepted or
rejected, will confirm purchases and sales with each customer purchasing or
selling shares of AMPS as a result of the Auction and will advise each customer
purchasing or selling shares of AMPS to give instructions to its Agent Member of
the Securities Depository to pay the purchase price against delivery of such
shares or to deliver such shares against payment therefor as appropriate. If a
customer selling shares of AMPS as a result of an Auction shall fail to instruct
its Agent Member to deliver such shares, the Broker-Dealer that submitted such
customer's Bid or Sell Order will instruct such Agent Member to deliver such
shares against payment therefor. Each Broker-Dealer that submitted a Hold Order
in an Auction on behalf of a customer also will advise such customer of the
Applicable Rate for the next Dividend Period for the AMPS. The Auction Agent
will record each transfer of shares of AMPS on the record book of Existing
Holders to be maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the
day after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of shares of AMPS as determined in such
Auction. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery through their Agent Members;
the Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment in same-day funds. If the procedures
of the Securities Depository applicable to AMPS shall be changed to provide for
payment in next-day funds, then purchasers may be required to make payment in
next-day funds. If the certificates for shares of AMPS are not held by the
Securities Depository or its nominee, payment will be made in same-day funds to
the Auction Agent against delivery of such certificates.
If any Existing Holder selling shares of AMPS in an Auction fails to
deliver such shares, the Broker-Dealer of any person that was to have purchased
shares of AMPS in such Auction may deliver to such person a number of whole
shares of AMPS that is less than the number of shares that otherwise was to be
purchased by such person. In such event, the number of shares of AMPS to be so
delivered will be determined by such Broker-Dealer. Delivery of such lesser
number of shares will constitute good delivery. Each Broker-Dealer Agreement
also will provide that neither the Fund nor the Auction Agent will have
responsibility or liability with respect to the failure of a Potential
Beneficial Owner, Beneficial Owner or their respective Agent Members to deliver
shares of AMPS or to pay for shares of AMPS purchased or sold pursuant to an
Auction or otherwise.
30
<PAGE> 32
BROKER-DEALERS
General. The Broker-Dealer Agreements provide that a Broker-Dealer may
submit Orders in Auctions for its own account, unless the Fund notifies all
Broker-Dealers that they no longer may do so; provided that Broker-Dealers may
continue to submit Hold Orders and Sell Orders. If a Broker-Dealer submits an
Order for its own account in any Auction of any series of AMPS, it may have
knowledge of Orders placed through it in that Auction and therefore have an
advantage over other Bidders, but such Broker-Dealer would not have knowledge of
Orders submitted by other Broker-Dealers in that Auction.
Fees. The Auction Agent after each Auction will pay a service charge from
funds provided by the Fund to each Broker-Dealer on the basis of the purchase
price of shares of AMPS placed by such Broker-Dealer at such Auction. The
service charge (i) for any 7-Day Dividend Period shall be payable at the annual
rate of 0.25% of the purchase price of the shares of AMPS placed by such
Broker-Dealer in any such Auction and (ii) for any Special Dividend Period shall
be determined by mutual consent of the Fund and any such Broker-Dealer or
Broker-Dealers and shall be based upon a selling concession that would be
applicable to an underwriting of fixed or variable rate preferred shares with a
similar final maturity or variable rate dividend period, respectively, at the
commencement of the Dividend Period with respect to such Auction. For the
purposes of the preceding sentence, shares of AMPS will be placed by a
Broker-Dealer if such shares were (i) the subject of Hold Orders deemed to have
been made by Beneficial Owners that were acquired by such Beneficial Owners
through such Broker-Dealer or (ii) the subject of the following Orders submitted
by such Broker-Dealer: (A) a Submitted Bid of a Beneficial Owner that resulted
in such Beneficial Owner continuing to hold such shares as a result of the
Auction, (B) a Submitted Bid of a Potential Beneficial Owner that resulted in
such Potential Beneficial Owner purchasing such shares as a result of the
Auction or (C) a Submitted Hold Order.
Secondary Trading Market. The Broker-Dealers intend to maintain a
secondary trading market in the AMPS outside of Auctions; however, they have no
obligation to do so and there can be no assurance that a secondary market for
the AMPS will develop or, if it does develop, that it will provide holders with
a liquid trading market (i.e., trading will depend on the presence of willing
buyers and sellers and the trading price is subject to variables to be
determined at the time of the trade by the Broker-Dealers). The AMPS will not be
registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates, particularly during any Long-Term
Dividend Period, likely will have an adverse effect on the secondary market
price of the AMPS, and a selling shareholder may sell AMPS between Auctions at a
price per share of less than $25,000.
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the end of this prospectus.
The Fund intends that, so long as shares of AMPS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's and
S&P in connection with the Fund's receipt of a rating for such shares on or
prior to their Date of Original Issue of at least "aaa" from Moody's and AAA
from S&P. Moody's and S&P, which are NRSROs, issue ratings for various
31
<PAGE> 33
securities reflecting the perceived creditworthiness of such securities. The
guidelines described below have been developed by Moody's and S&P in connection
with issuances of asset-backed and similar securities, including debt
obligations and variable rate preferred stock, generally on a case-by-case basis
through discussions with the issuers of these securities. The guidelines are
designed to ensure that assets underlying outstanding debt or preferred stock
will be varied sufficiently and will be of sufficient quality and amount to
justify investment-grade ratings. The guidelines do not have the force of law
but have been adopted by the Fund in order to satisfy current requirements
necessary for Moody's and S&P to issue the above-described ratings for shares of
AMPS, which ratings generally are relied upon by institutional investors in
purchasing such securities. The guidelines provide a set of tests for portfolio
composition and asset coverage that supplement (and in some cases are more
restrictive than) the applicable requirements under the 1940 Act. See
"Description of AMPS-Asset Maintenance" herein and in the statement of
additional information.
The Fund intends to maintain a Discounted Value for its portfolio at least
equal to the AMPS Basic Maintenance Amount. Moody's and S&P each has established
separate guidelines for determining Discounted Value. To the extent any
particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of Discounted Value (as defined by such rating agency). The Moody's
and S&P guidelines do not impose any limitations on the percentage of Fund
assets that may be invested in holdings not eligible for inclusion in the
calculation of the Discounted Value of the Fund's portfolio.
Upon any failure to maintain the required Discounted Value, the Fund will
seek to alter the composition of its portfolio to reattain a Discounted Value at
least equal to the AMPS Basic Maintenance Amount on or prior to the AMPS Basic
Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities. To the
extent any such failure is not cured in a timely manner, shares of AMPS will be
subject to redemption. See "Description of AMPS-Asset Maintenance" and
"Description of AMPS-Redemption" herein and in the statement of additional
information.
The Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the shares of AMPS, at any time, may change or withdraw
any such rating. As set forth in the Articles Supplementary, the Board of
Directors, without shareholder approval, may modify certain definitions or
restrictions that have been adopted by the Fund pursuant to the rating agency
guidelines, provided the Board of Directors has obtained written confirmation
from Moody's and S&P that any such change would not impair the ratings then
assigned by Moody's and S&P to the AMPS.
As described by Moody's and S&P, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock obligations.
The ratings on the AMPS are not recommendations to purchase, hold or sell shares
of AMPS, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor, nor do the rating agency guidelines
described above address the likelihood that a holder of shares of AMPS will be
able to sell such shares in an Auction. The ratings are based on current
information furnished to Moody's and S&P by the Fund and the Investment Adviser
and information obtained from other sources. The
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<PAGE> 34
ratings may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The Common Stock has not been rated by a
nationally recognized statistical rating organization.
For additional information concerning the Moody's and S&P ratings
guidelines, see "Rating Agency Guidelines" in the statement of additional
information.
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, provides the
Fund with investment advisory and management services. The Asset Management
Group of ML & Co., (which includes the Investment Adviser) acts as the
investment adviser to more than 100 other registered investment companies and
offers investment advisory services to individuals and institutional accounts.
As of April 1999, the Asset Management Group had a total of approximately $523
billion in investment company and other portfolio assets under management
(approximately $40 billion of which were invested in municipal securities). This
amount includes assets managed for certain affiliates of the Investment Adviser.
The Investment Adviser is a limited partnership, the partners of which are ML &
Co. and Princeton Services. The principal business address of the Investment
Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement provides that, subject to the supervision
of the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors.
The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. Robert A. DiMella and
Roberto W. Roffo are the portfolio managers of the Fund and are primarily
responsible for the Fund's day-to-day management.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.55 of
1% of the Fund's average weekly net assets (i.e., the average weekly value of
the total assets of the Fund, including proceeds from the issuance of shares of
preferred stock, minus the sum of accrued liabilities of the Fund and
accumulated dividends on the shares of preferred stock). For purposes of this
calculation, average weekly net assets are determined at the end of each month
on the basis of the average net assets of the Fund for each week during the
month. The assets for each weekly period are determined by averaging the net
assets at the last business day of a week with the net assets at the last
business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the compensation of all Directors of the Fund who are affiliated persons of
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<PAGE> 35
the Investment Adviser or any of its affiliates. The Fund pays all other
expenses incurred in the operation of the Fund, including, among other things,
expenses for legal and auditing services, taxes, costs of printing proxies,
listing fees, if any, stock certificates and shareholder reports, charges of the
custodian and the transfer and dividend disbursing agent and registrar, fees and
expenses with respect to the issuance of preferred stock, Securities and
Exchange Commission fees, fees and expenses of non-interested Directors,
accounting and pricing costs, insurance, interest, brokerage costs, litigation
and other extraordinary or non-recurring expenses, mailing and other expenses
properly payable by the Fund. Accounting services are provided to the Fund by
the Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services.
TAXES
In general, dividends on the AMPS will be exempt from Federal income tax in
the hands of holders of such AMPS, subject to the possible application of the
Federal alternative minimum tax. However, the Fund is required to allocate net
capital gains and other taxable income, if any, proportionately among the common
stock and AMPS in accordance with the current position of the Internal Revenue
Service ("IRS") described under the heading "Taxes" in the statement of
additional information. The Fund may notify the Auction Agent of the amount of
any net capital gains or other anticipated taxable income to be included in any
dividend on the AMPS prior to the Auction establishing the Applicable Dividend
Rate for such dividend. The Auction Agent will in turn notify holders of the
AMPS and prospective purchasers. The amount of taxable income allocable to AMPS
will depend upon the amount of such income realized by the Fund and cannot be
determined with certainty prior to the end of the Fund's fiscal year, but it is
not generally expected to be significant.
As long as not less than 80% of the aggregate principal amount of the
Fund's investments are invested in New Jersey Municipal Bonds at the end of each
quarter of the tax year, the portion of exempt-interest dividends paid from
interest received by the Fund from New Jersey Municipal Bonds will be exempt
from New Jersey personal income tax (the "80% Test"). For purposes of
calculating whether the 80% Test is satisfied, financial options, futures,
forward contracts and similar financial instruments relating to interest-bearing
obligations are excluded from the principal amount of the Fund's investments.
Regardless of whether the Fund meets the 80% Test, all distributions
attributable to interest earned on Federal obligations will be exempt from New
Jersey personal income tax. Exempt-interest dividends and gains paid to a
corporate shareholder will be subject to New Jersey corporation business
(franchise) tax, and, if applicable, the New Jersey corporation income tax.
Shareholders subject to income taxation by states other than New Jersey will
realize a lower after-tax rate of return than New Jersey shareholders since the
dividends distributed by the Fund generally will not be exempt, to any
significant degree, from income taxation by such other states.
Generally, within 60 days after the end of the Fund's taxable year, the
Fund will tell you the amount of exempt-interest dividends and capital gain
dividends you received that year. Capital gain dividends are taxable as
long-term capital gains to you regardless of how long you have held your shares.
The tax treatment of distributions from the Fund is the same whether you choose
to receive distributions in cash or to have them reinvested in shares of the
Fund.
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<PAGE> 36
If the Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of AMPS who are subject to the Retroactive Taxable
Allocation. See "Description of AMPS-Dividends-Additional Dividends." The
Federal income tax consequences of Additional Dividends under existing law are
uncertain. The Fund intends to treat a holder as receiving a dividend
distribution in the amount of any Additional Dividend only as and when such
Additional Dividend is paid. An Additional Dividend generally will be designated
by the Fund as an exempt-interest dividend except as otherwise required by
applicable law. However, the IRS may assert that all or part of an Additional
Dividend is a taxable dividend either in the taxable year for which the
Retroactive Taxable Allocation is made or in the taxable year in which the
Additional Dividend is paid.
Because the Fund may from time to time invest a substantial portion of its
portfolio in municipal securities bearing income that is taxable under the
Federal alternative minimum tax, the Fund would not ordinarily be a suitable
investment for investors who are subject to the alternative minimum tax.
If at any time when AMPS are outstanding the Fund does not meet the asset
coverage requirements of the 1940 Act, the Fund will be required to suspend
distributions to holders of common stock until the asset coverage is restored.
See "Description of AMPS-Restrictions on Dividends and Other Payments." This may
prevent the Fund from meeting certain distribution requirements for
qualification as a regulated investment company ("RIC"). Upon any failure to
meet the asset coverage requirements of the 1940 Act, the Fund, in its sole
discretion, may, and under certain circumstances will be required to, redeem
AMPS in order to maintain or restore the requisite asset coverage and avoid the
adverse consequences to the Fund and its shareholders of failing to qualify as a
RIC. See "Description of AMPS-Redemption." There can be no assurance, however,
that any such action would achieve such objectives.
By law, the Fund must withhold 31% of your distributions and proceeds if
you have not provided a taxpayer identification number or social security
number. For more information regarding the tax treatment of an investment in
AMPS, see "Taxes" in the statement of additional information.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares were initially classified as common
stock. The Board of Directors is authorized, however, to classify or reclassify
any unissued shares of capital stock by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption. In this regard,
the Board of Directors has reclassified shares of unissued common
stock as AMPS. For a description of the shares of AMPS, see "Description of
AMPS" herein and in the statement of additional information.
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<PAGE> 37
The following table shows the amount of (i) capital stock authorized, (ii)
capital stock held by the Fund for its own account and (iii) capital stock
outstanding for each class of authorized securities of the Fund as of ,
1999.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
(EXCLUSIVE OF
AMOUNT HELD AMOUNT HELD
BY FUND BY FUND FOR
AMOUNT FOR ITS OWN ITS OWN
TITLE OF CLASS AUTHORIZED ACCOUNT ACCOUNT)
-------------- ---------- ----------- ---------------
<S> <C> <C> <C>
Common Stock........................................ -0-
Auction Market Preferred Stock...................... -0- -0-
</TABLE>
COMMON STOCK
Holders of common stock are entitled to share equally in dividends declared
by the Board of Directors payable to holders of common stock and in the net
assets of the Fund available for distribution to holders of common stock after
payment of the preferential amounts payable to holders of any outstanding
preferred stock. Neither holders of common stock nor holders of preferred stock
have pre-emptive or conversion rights and shares of common stock are not
redeemable. The outstanding shares of common stock are fully paid and
non-assessable.
Holders of common stock are entitled to one vote for each share held and
will vote with the holders of any outstanding shares of AMPS or other preferred
stock on each matter submitted to a vote of holders of common stock, except as
described under "Description of AMPS-Voting Rights" herein and in the statement
of additional information.
Shareholders are entitled to one vote for each share held. The shares of
common stock, AMPS and any other preferred stock do not have cumulative voting
rights, which means that the holders of more than 50% of the shares of common
stock, AMPS and any other preferred stock voting for the election of Directors
can elect all of the Directors standing for election by such holders, and, in
such event, the holders of the remaining shares of common stock, AMPS and any
other preferred stock will not be able to elect any of such Directors.
So long as any shares of AMPS or any other preferred stock are outstanding,
holders of common stock will not be entitled to receive any dividends of or
other distributions from the Fund unless all accumulated dividends on
outstanding shares of AMPS and any other preferred stock have been paid, and
unless asset coverage (as defined in the 1940 Act) with respect to such AMPS and
any other preferred stock would be at least 200% after giving effect to such
distributions. See "Description of AMPS-Restrictions on Dividends and Other
Payments" herein and in the statement of additional information.
The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The shares of common stock will commence trading on the NYSE on ,
1999. At , 1999, the net asset value per share of common stock was
$ .
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<PAGE> 38
PREFERRED STOCK
Under the Articles Supplementary, the Fund is authorized to issue an
aggregate of shares of AMPS. See "Description of AMPS." Under the 1940
Act, the Fund is permitted to have outstanding more than one series of preferred
stock as long as no single series has priority over another series as to the
distribution of assets of the Fund or the payment of dividends. Neither holders
of common stock nor holders of preferred stock have pre-emptive rights to
purchase any shares of AMPS or any other preferred stock that might be issued.
It is anticipated that the net asset value per share of the AMPS will equal its
original purchase price per share plus accumulated dividends per share.
CERTAIN PROVISIONS OF THE CHARTER
The Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the Fund
or to change the composition of its Board of Directors and could have the effect
of depriving shareholders of an opportunity to sell their shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund. A director may be removed from office with or
without cause but only by vote of the holders of at least 66 2/3% of the votes
entitled to be voted on the matter. A director elected by all of the holders of
capital stock may be removed only by action of such holders, and a director
elected by the holders of AMPS and any other preferred stock may be removed only
by action of AMPS and any other preferred stock.
In addition, the Charter requires the favorable vote of the holders of at
least 66 2/3% of the Fund's shares of capital stock, then entitled to be voted,
voting as a single class, to approve, adopt or authorize the following:
- a merger or consolidation or statutory share exchange of the Fund with
any other corporation,
- a sale of all or substantially all of the Fund's assets (other than in
the regular course of the Fund's investment activities), or
- a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in accordance
with the by-laws, in which case the affirmative vote of a majority of all of the
votes entitled to be cast by shareholders of the Fund, voting as a single class,
is required. Such approval, adoption or authorization of the foregoing would
also require the favorable vote of at least a majority of the Fund's shares of
preferred stock then entitled to be voted, including the AMPS, voting as a
separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Charter. The amendment would have to be
declared advisable by the Board of Directors prior to its submission to
shareholders. Such an amendment would require the favorable vote of the holders
of at least 66 2/3% of the Fund's outstanding shares of capital stock (including
the AMPS and any other preferred stock) entitled to be voted on the matter,
voting as a single class (or a majority of such shares if the amendment was
previously approved, adopted or authorized by at least two-thirds of the total
number of Directors fixed in accordance with the by-laws), and, the affirmative
vote of at least a majority of outstanding shares of preferred stock of the
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<PAGE> 39
Fund (including the AMPS), voting as a separate class. Such a vote also would
satisfy a separate requirement in the 1940 Act that the change be approved by
the shareholders. Shareholders of an open-end investment company may require the
company to redeem their shares of common stock at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less such redemption charge, if any, as might be in effect at the time of a
redemption. All redemptions will be made in cash. If the Fund is converted to an
open-end investment company, it could be required to liquidate portfolio
securities to meet requests for redemption. Conversion to an open-end investment
company would also require redemption of all outstanding shares of preferred
stock (including the AMPS) and would require changes in certain of the Fund's
investment policies and restrictions, such as those relating to the issuance of
senior securities, the borrowing of money and the purchase of illiquid
securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the 1940 Act, are in the best interests of shareholders generally.
Reference should be made to the Charter on file with the Commission for the full
text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custody agreement with
.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase from the Fund all of the shares of
AMPS of each series offered hereby. The Underwriter is committed to purchase all
of such shares if any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer
the shares of AMPS to the public at the public offering price set forth on the
cover page of this prospectus, and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriter may allow, and such
dealers may reallow, a discount not in excess of $ per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed. The sales load of $ per share is
equal to % of the initial public offering price. Investors must pay for any
AMPS purchased in the initial public offering on or before , 1999.
The Underwriter will act in Auctions as a Broker-Dealer as set forth under
"The Auction-General-Broker-Dealer Agreements" and will be entitled to fees for
services as a Broker-Dealer as set forth under "The Auction-Broker-Dealers". The
Underwriter also may provide information to be used in ascertaining the
Reference Rate.
The Fund anticipates that the Underwriter from time to time may act as a
broker in connection with the execution of the Fund's portfolio transactions.
The Fund has obtained exemptive orders permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short-term,
tax-exempt securities, subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions" in the statement of additional
information.
The Underwriter is an affiliate of the Investment Adviser.
38
<PAGE> 40
The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities including liabilities under the
Securities Act of 1933, as amended.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of AMPS will be IBJ Whitehall Bank & Trust Company, One State Street, New York,
New York 10004. The transfer agent, dividend disbursing agent and shareholder
servicing agent for the shares of Common Stock is .
LEGAL OPINIONS
Certain legal matters in connection with the AMPS offered hereby will be
passed upon for the Fund and the Underwriter by Brown & Wood LLP, One World
Trade Center, New York, New York 10048-0557.
EXPERTS
The statement of assets, liabilities and capital of the Fund as of
, 1999 included in the statement of additional information has been so
included in reliance on the report of , independent auditors, and on
their authority as experts in auditing and accounting. The selection of
independent auditors is subject to ratification by shareholders of the Fund.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Investment Adviser or other Fund
service providers do not properly address this problem before January 1, 2000.
The Investment Adviser expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Investment Adviser that they
also expect to resolve the Year 2000 Problem, and the Investment Adviser will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the issuers of securities
in which the Fund invests, and this could hurt the Fund's investment returns.
39
<PAGE> 41
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies........................... 2
Investment Restrictions..................................... 6
Description of AMPS......................................... 7
The Auction................................................. 15
Rating Agency Guidelines.................................... 16
Directors and Officers...................................... 24
Investment Advisory and Management Arrangements............. 26
Portfolio Transactions...................................... 27
Taxes....................................................... 28
Net Asset Value............................................. 32
Additional Information...................................... 33
Independent Auditors' Report................................ 34
Statement of Assets, Liabilities and Capital................ 35
Notes to Financial Statements (Unaudited)................... 38
Appendix A -- Economic Conditions in New Jersey............. A-1
Appendix B -- Ratings of Municipal Bonds.................... B-1
Appendix C -- Portfolio Insurance........................... C-1
Appendix D -- Settlement Procedures......................... D-1
Appendix E -- Auction Procedures............................ E-1
</TABLE>
40
<PAGE> 42
GLOSSARY
" 'AA' (AA) Composite Commercial Paper Rate," on any Valuation Date, means
(i) the Interest Equivalent of the rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the
equivalent of such rating by another nationally recognized statistical rating
organization, as such rate is made available on a discount basis or otherwise by
the Federal Reserve Bank of New York for the Business Day immediately preceding
such date, or (ii) in the event that the Federal Reserve Bank of New York does
not make available such a rate, then the arithmetic average of the Interest
Equivalent of the rate on commercial paper placed on behalf of such issuers, as
quoted on a discount basis or otherwise by Merrill Lynch, Pierce, Fenner & Smith
Incorporated or its successors that are Commercial Paper Dealers, to the Auction
Agent for the close of business on the Business Day immediately preceding such
date. If one of the Commercial Paper Dealers does not quote a rate required to
determine the "AA" Composite Commercial Paper Rate, the "AA" Composite
Commercial Paper Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Fund to provide such rate or rates not
being supplied by the Commercial Paper Dealer. If the number of Dividend Period
days shall be (i) 7 or more but fewer than 49 days, such rate shall be the
Interest Equivalent of the 30-day rate on such commercial paper; (ii) 49 or more
but fewer than 70 days, such rate shall be the Interest Equivalent of the 60-day
rate on such commercial paper; (iii) 70 or more days but fewer than 85 days,
such rate shall be the arithmetic average of the Interest Equivalent of the
60-day and 90-day rates on such commercial paper; (iv) 85 or more days but fewer
than 99 days, such rate shall be the Interest Equivalent of the 90-day rate on
such commercial paper; (v) 99 or more days but fewer than 120 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 90-day and
120-day rates on such commercial paper; (vi) 120 or more days but fewer than 141
days, such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate on
such commercial paper.
"Additional Dividend" has the meaning set forth on page 19 of this
prospectus.
"Agent Member" means the member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more shares of AMPS or on behalf of a
Potential Beneficial Owner.
"AMPS" means the Auction Market Preferred Stock, Series A, and the Auction
Market Preferred Stock, Series B, each with a par value of $.10 per share and a
liquidation preference of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared), of the Fund.
"AMPS Basic Maintenance Amount" has the meaning set forth on page 20 of
this prospectus.
"AMPS Basic Maintenance Cure Date" has the meaning set forth on page 20 of
this prospectus.
"AMPS Basic Maintenance Report" has the meaning set forth on page 12 of the
statement of additional information.
41
<PAGE> 43
"Anticipation Notes" means the following New Jersey Municipal Bonds:
revenue anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page 25 of this
prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on shares of AMPS for any Dividend Period.
"Articles Supplementary" means the Articles Supplementary of the Fund
specifying the powers, preferences and rights of the shares of AMPS.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Whitehall Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Directors of the Fund or a duly authorized
committee thereof enters into an agreement with the Fund to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the AMPS.
"Auction Agent Agreement" means the agreement entered into between the Fund
and the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"Auction Date" has the meaning set forth on page 23 of this prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth
in Appendix E to the statement of additional information.
"Available AMPS" has the meaning set forth on page 28 of this prospectus.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or if applicable, the Auction Agent) as a holder
of shares of AMPS or a Broker-Dealer that holds AMPS for its own account.
"Bid" has the meaning set forth on page 24 of this prospectus.
"Bidder" has the meaning set forth on pages 24 and 25 of this prospectus.
"Board of Directors" or "Board" means the Board of Directors of the Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in the Auction Procedures,
that has been selected by the Fund and has entered into a Broker-Dealer
Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the
Auction Agent and a Broker-Dealer, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in The
City of New York are authorized or obligated by law to close.
42
<PAGE> 44
"Cede" means Cede & Co., the nominee of DTC, and in whose name the shares
of AMPS initially will be registered.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including the Articles Supplementary), of the Fund.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the Fund from
time to time may appoint or, in lieu thereof, their respective affiliates and
successors.
"Common stock" means the common stock, par value $.10 per share, of the
Fund.
"Date of Original Issue" means, with respect to each share of AMPS, the
date on which such share first is issued by the Fund.
"Deposit Securities" means cash and New Jersey Municipal Bonds and
Municipal Bonds rated at least A2 (having a remaining maturity of 12 months or
less), P-1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12
months or less), A-1+ or SP-1+ by S&P.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount
Factor, as the case may be.
"Discounted Value" of any asset of the Fund means (i) with respect to an
S&P Eligible Asset, the quotient of the market value thereof divided by the
applicable S&P Discount Factor and (ii) with respect to a Moody's Eligible
Asset, the lower of par and the quotient of the market value thereof divided by
the applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page 16 of this
prospectus.
"Dividend Period" has the meaning set forth on page 16 of this prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible Assets, as
the case may be.
"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by the Fund that is listed as the holder of record of shares of AMPS
in the records of the Auction Agent.
"Fitch" means Fitch IBCA, Inc. or its successors.
"Forward Commitment" has the meaning set forth on page 23 of the statement
of additional information.
"Fund" means MuniHoldings New Jersey Insured Fund IV, Inc., a Maryland
corporation that is the issuer of the AMPS.
"Hold Order" has the meaning set forth on page 24 of this prospectus.
"Initial Dividend Payment Date" means, with respect to each series of AMPS,
the first Dividend Payment Date for the AMPS as set forth on page 16 of this
prospectus.
43
<PAGE> 45
"Initial Dividend Period" means, the period from and including the Date of
Original Issue to but excluding the Initial Dividend Payment Date for each
series of AMPS.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a financial
futures contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"Investment Adviser" means Fund Asset Management, L.P.
"IRS" means the United States Internal Revenue Service.
"Long Term Dividend Period" means a dividend period of one year or more but
not greater than five years.
"Mandatory Redemption Price" has the meaning set forth on page 21 of this
prospectus.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Maximum Applicable Rate" has the meaning set forth on page 25 of this
prospectus.
"Maximum Potential Additional Dividend Liability" has the meaning set forth
on page 12 of the statement of additional information.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on page 20 of the
statement of additional information.
"Moody's Eligible Assets" has the meaning set forth on page 19 of the
statement of additional information.
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and initially shall be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth on page 22 of the
statement of additional information.
44
<PAGE> 46
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
<TABLE>
<CAPTION>
% CHANGE IN MOODY'S
MARGINAL TAX RATE VOLATILITY FACTOR
----------------- -----------------
<S> <C>
# 5%............................................. 292%
> 5% but < 10%................................... 313%
-
>10% but < 15%................................... 338%
-
>15% but < 20%................................... 364%
-
>20% but < 25%................................... 396%
-
>25% but < 30%................................... 432%
-
>30% but < 35%................................... 472%
-
>35% but < 40%................................... 520%
-
</TABLE>
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the Fund in
writing is applicable.
"Municipal Bonds" has the meaning set forth on page 8 of this prospectus.
"Municipal Index" has the meaning set forth on page 18 of the statement of
additional information.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act AMPS Asset Coverage" has the meaning set forth on page 20 of this
prospectus.
"1940 Act Cure Date" has the meaning set forth on page 20 of this
prospectus.
"New Jersey Municipal Bonds" has the meaning set forth on page 8 of this
prospectus.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page 9 of the statement
of additional information.
"Non-Payment Period Rate" has the meaning set forth on page 10 of the
statement of additional information.
"Notice of Revocation" has the meaning set forth on page 9 of the statement
of additional information.
"Notice of Special Dividend Period" has the meaning set forth on pages 17
and 18 of this prospectus.
"Optional Redemption Price" has the meaning set forth on page 21 of this
prospectus.
"Order" has the meaning set forth on page 24 of this prospectus.
"Policy" means an insurance policy purchased by the Fund which guarantees
the payment of principal and interest on specified New Jersey Municipal Bonds or
Municipal Bonds during the period in which such New Jersey Municipal Bonds or
Municipal Bonds are owned by the Fund;
45
<PAGE> 47
provided, however, that, as long as the AMPS are rated by Moody's and S&P, the
Fund will not obtain any Policy unless Moody's and S&P advise the Fund in
writing that the purchase of such Policy will not adversely affect their
then-current rating on the AMPS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other person as may
be permitted by the Fund, including any Existing Holder, who may be interested
in acquiring shares of AMPS (or, in the case of an Existing Holder, additional
shares of AMPS).
"Preferred stock" means preferred stock, par value $.10 per share, of the
Fund.
"Premium Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Receivables for New Jersey Municipal Bonds Sold," for purposes of
determining S&P Eligible Assets, has the meaning set forth on pages 16 and 17 of
the statement of additional information.
"Receivables for New Jersey Municipal Bonds or Municipal Bonds Sold," for
purposes of determining Moody's Eligible Assets, has the meaning set forth on
page 20 of the statement of additional information.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period, having
more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial
Paper Rate, (iii) with respect to any Short Term Dividend Period having 183 or
more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and (iv)
with respect to any Long Term Dividend Period, the applicable U.S. Treasury Note
Rate.
"Request for Special Dividend Period" has the meaning set forth on page 17
of this prospectus.
"Response" has the meaning set forth on page 17 of this prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page 18 of
this prospectus.
"Series A AMPS" means Auction Market Preferred Stock, Series A, with a par
value of $.10 per share and a liquidation preference of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared), of the Fund.
"Series B AMPS" means Auction Market Preferred Stock, Series B, with a par
value of $1.10 per share and a liquidation preference of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared), of the Fund.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors.
"S&P Discount Factor" has the meaning set forth on page 16 of the statement
of additional information.
46
<PAGE> 48
"S&P Eligible Assets" has the meaning set forth on page 16 of the statement
of additional information.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance Cure
Date, that the Fund has under the Articles Supplementary to cure any failure to
maintain, as of such Valuation Date, a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount.
"S&P Hedging Transactions" has the meaning set forth on pages 18 and 19 of
the statement of additional information.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Fund in writing is applicable.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with shares of AMPS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" means a dividend period the number of days in
which are evenly divisible by seven, and not fewer than seven days nor more than
364 days.
"Special Dividend Period" has the meaning set forth on page 16 of this
prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Directors of the Fund, after consultation with the
Auction Agent and the Broker-Dealers, during which the shares of AMPS subject to
such Dividend Period shall not be subject to redemption at the option of the
Fund and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years and determined by the Board of Directors of the Fund, after
consultation with the Auction Agent and the Broker-Dealers, during each year of
which the shares of AMPS subject to such Dividend Period shall be redeemable at
the Fund's option at a price per share equal to $25,000 plus accumulated but
unpaid dividends plus a premium expressed as a percentage of $25,000, as
determined by the Board of Directors of the Fund after consultation with the
Auction Agent and the Broker-Dealers.
"Submission Deadline" has the meaning set forth on page 27 of this
prospectus.
"Submitted Bid" has the meaning set forth on page 28 of this prospectus.
"Submitted Hold Order" has the meaning set forth on page 28 of this
prospectus.
"Submitted Order" has the meaning set forth on page 28 of this prospectus.
"Submitted Sell Order" has the meaning set forth on page 28 of this
prospectus.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations,
47
<PAGE> 49
respectively, selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated, or
its respective affiliates and successors, after consultation with the Fund, to
act as a substitute rating agency or substitute rating agencies, as the case may
be, to determine the credit ratings of the AMPS.
"Sufficient Clearing Bids" has the meaning set forth on page 28 of this
prospectus.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index"), or any successor index made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., Eastern time, on
such date by Kenny Information Systems Inc. or any successor thereto, based upon
30-day yield evaluations at par of bonds the interest on which is excludable for
regular Federal income tax purposes under the Code of "high grade" component
issuers selected by Kenny Information Systems Inc. or any such successor from
time to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57(a) (5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
provided, however, that if the Kenny Index is not made so available by 8:30
A.M., Eastern time, on such date by Kenny Information Systems Inc. or any
successor, the Taxable Equivalent of the Short-Term Municipal Bond Rate shall
mean the quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the most recent Kenny Index so made available for any preceding
Business Day, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal). The Fund may not utilize a successor index to the Kenny Index unless
Moody's and S&P provide the Fund with written confirmation that the use of such
successor index will not adversely affect the then-current respective Moody's
and S&P ratings of the AMPS.
"Treasury Bonds" has the meaning set forth on page 18 of the statement of
additional information.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate" on
any date means the Interest Equivalent of the yield as calculated by reference
to the arithmetic average of the bid price quotations of the actively traded
Treasury Bill with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by bid price quotations as of any time on
the Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or
48
<PAGE> 50
(ii) if such yield as so calculated is not available, the Alternate Treasury
Note Rate on such date. "Alternate Treasury Note Rate" on any date means the
yield as calculated by reference to the arithmetic average of the bid price
quotations of the actively traded, current coupon Treasury Note with a maturity
most nearly comparable to the length of the related Dividend Period, as
determined by the bid price quotations as of any time on the Business Day
immediately preceding such date, obtained from at least three recognized primary
U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" has the meaning set forth on page 20 of this prospectus.
"Variation Margin" means, in connection with an outstanding financial
futures contract owned or sold by the Fund, the amount of cash or securities
paid to or received from a broker (subsequent to the Initial Margin payment)
from time to time as the price of such financial futures contract fluctuates.
"Winning Bid Rate" has the meaning set forth on page 28 of this prospectus.
49
<PAGE> 51
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
AUCTION MARKET PREFERRED STOCK(R) ["AMPS(R)"]
SHARES, SERIES A
SHARES, SERIES B
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
, 1999
(R) Registered trademarks of Merrill Lynch & Co. Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 52
THE INFORMATION CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED JUNE 30, 1999
STATEMENT OF ADDITIONAL INFORMATION
$
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
AUCTION MARKET PREFERRED STOCK ["AMPS(R)"]
SHARES, SERIES A
SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
------------------------
MuniHoldings New Jersey Insured Fund IV, Inc. (the "Fund") is a recently
organized, non-diversified, closed-end management investment company that seeks
to provide shareholders with current income exempt from Federal income tax and
New Jersey personal income taxes. The Fund seeks to achieve its objective by
investing primarily in a portfolio of long-term, investment grade municipal
obligations the interest on which, in the opinion of bond counsel to the issuer,
is exempt from Federal income tax and New Jersey personal income taxes. The Fund
intends to invest in municipal obligations that are rated investment grade or,
if unrated, are considered by the Fund's investment adviser to be of comparable
quality. Under normal circumstances, at least 80% of the Fund's assets will be
invested in municipal obligations with remaining maturities of one year or more
that are covered by insurance guaranteeing the timely payment of principal at
maturity and interest. There can be no assurance that the Fund's investment
objective will be realized. For more information on the Fund's investment
objective and policies, see "Investment Objective and Policies."
------------------------
Certain capitalized terms not otherwise defined in this statement of
additional information have the meaning provided in the Glossary included as
part of the prospectus.
This statement of additional information is not a prospectus, but should be
read in conjunction with the prospectus of the Fund, which has been filed with
the Securities and Exchange Commission (the "Commission") and can be obtained,
without charge, by calling (800) 637-3863. The prospectus is incorporated by
reference into this statement of additional information, and this statement of
additional information is incorporated by reference into the prospectus.
- ---------------
(R) Registered trademark of Merrill Lynch & Co., Inc.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this statement of additional information is , 1999.
<PAGE> 53
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Investment Objective and Policies........................... 2
Investment Restrictions..................................... 6
Description of AMPS......................................... 7
The Auction................................................. 15
Rating Agency Guidelines.................................... 16
Directors and Officers...................................... 24
Investment Advisory and Management Arrangements............. 26
Portfolio Transactions...................................... 27
Taxes....................................................... 28
Net Asset Value............................................. 32
Additional Information...................................... 33
Independent Auditors' Report................................ 34
Statement of Assets, Liabilities and Capital................ 35
Notes to Financial Statements (Unaudited)................... 38
Appendix A -- Economic and Other Conditions in New Jersey... A-1
Appendix B -- Ratings of Municipal Bonds.................... B-1
Appendix C -- Portfolio Insurance........................... C-1
Appendix D -- Settlement Procedures......................... D-1
Appendix E -- Auction Procedures............................ E-1
</TABLE>
<PAGE> 54
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with current
income exempt from Federal income tax and New Jersey personal income taxes. The
Fund seeks to achieve its investment objective by investing primarily in a
portfolio of long-term, investment grade municipal obligations issued by or on
behalf of the State of New Jersey, its political subdivisions, agencies and
instrumentalities, and other qualifying issuers, each of which pays interest
which, in the opinion of bond counsel to the issuer, is exempt from Federal
income tax and New Jersey personal income taxes ("New Jersey Municipal Bonds").
The Fund intends to invest substantially all (at least 80%) of its assets in New
Jersey Municipal Bonds, except at times when the Fund's investment adviser, Fund
Asset Management, L.P. (the "Investment Adviser"), considers that New Jersey
Municipal Bonds of sufficient quality and quantity are unavailable for
investment at suitable prices by the Fund. To the extent the Investment Adviser
considers that suitable New Jersey Municipal Bonds are not available for
investment, the Fund may purchase other long-term municipal obligations exempt
from Federal but not New Jersey income taxes ("Municipal Bonds"). The Fund will
maintain at least 80% of its assets in New Jersey Municipal Bonds, except during
interim periods pending investment of the net proceeds of public offerings of
the Fund's securities and during temporary defensive periods. Under normal
circumstances, at least 80% of the Fund's assets will be invested in municipal
obligations with remaining maturities of one year or more that are covered by
insurance guaranteeing the timely payment of principal at maturity and interest.
If the Fund invests less then 80% of its assets in New Jersey Municipal Bonds,
the income provided by the Fund may not be exempt from New Jersey personal
income tax. The Fund's investment objective is a fundamental policy that may not
be changed without a vote of a majority of the Fund's outstanding voting
securities, as defined below under "Investment Restrictions." There can be no
assurance that the investment objective of the Fund will be realized. At times
the Fund may seek to hedge its portfolio through the use of options and futures
transactions to reduce volatility in the net asset value of its shares of common
stock.
The Fund ordinarily does not intend to realize significant interest income
that is subject to Federal income tax and New Jersey personal income taxes. The
Fund may invest all or a portion of its assets in certain tax-exempt securities
classified as "private activity bonds" (in general, bonds that benefit
non-governmental entities) that may subject certain investors in the Fund to a
Federal alternative minimum tax.
The Fund also may invest in securities not issued by or on behalf of a
state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in New Jersey Municipal Bonds and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act of 1940, as amended (the "1940 Act"). Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term New Jersey Municipal Bonds or Municipal
Bonds. Certain Non-Municipal Tax-Exempt Securities may be characterized as
derivative instruments. Non-Municipal Tax-Exempt Securities are considered "New
Jersey Municipal Bonds" or "Municipal Bonds" for purposes of the Fund's
investment objective and policies.
DESCRIPTION OF NEW JERSEY MUNICIPAL BONDS AND MUNICIPAL BONDS
New Jersey Municipal Bonds and Municipal Bonds include debt obligations
issued to obtain funds for various public purposes, including construction of a
wide range of public facilities, refunding of outstanding obligations and
obtaining funds for general operating expenses and loans to other public
institutions and facilities. In addition, certain types of private activity
bonds ("PABs") are issued by or on behalf of public authorities to finance
various privately operated facilities, including, among other things, airports,
public ports, mass commuting facilities, multi-family housing projects as well
as facilities for water supply, gas, electricity, sewage or solid waste
disposal. For purposes of this statement of additional information, such
obligations are considered Municipal Bonds if the interest paid thereon is
exempt from Federal income tax and as New Jersey Municipal Bonds if the interest
thereon is exempt from Federal income tax and New Jersey personal income taxes,
even though such bonds may be PABs as discussed below. Also, for purposes of
this statement of additional information, Non-Municipal Tax-Exempt securities as
discussed above will be considered New Jersey Municipal Bonds or Municipal
Bonds.
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<PAGE> 55
The two principal classifications of New Jersey Municipal Bonds and
Municipal Bonds are "general obligation" bonds and "revenue" bonds, which latter
category includes PABs and, for bonds issued on or before August 15, 1986,
industrial development bonds or "IDBs". General obligation bonds (other than
those of the State of New Jersey, which has limited taxing powers) are typically
secured by the issuer's pledge of faith, credit and taxing power for the
repayment of principal and the payment of interest. Revenue or special
obligation bonds are typically payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as from the user
of the facility being financed. PABs are in most cases revenue bonds and do not
generally constitute the pledge of the credit or taxing power of the issuer of
such bonds. The repayment of principal and the payment of interest on such IDBs
depends solely on the ability of the user of the facility financed by the bonds
to meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment. New Jersey Municipal Bonds
and Municipal Bonds may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or
municipality in question.
The Fund may purchase New Jersey Municipal Bonds and Municipal Bonds
classified as PABs. Interest received on certain PABs is treated as an item of
"tax preference" for purposes of the Federal alternative minimum tax and may
impact the overall tax liability of investors in the Fund. There is no
limitation on the percentage of the Fund's assets that may be invested in New
Jersey Municipal Bonds and Municipal Bonds the interest on which is treated as
an item of "tax preference" for purposes of the Federal alternative minimum tax.
See "Taxes -- General."
Also included within the general category of New Jersey Municipal Bonds
and/or Municipal Bonds are certificates of participation ("COPs") executed and
delivered for the benefit of government authorities or entities to finance the
acquisition or construction of equipment, land and/or facilities. COPs represent
participations in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively referred to as "lease obligations")
relating to such equipment, land or facilities. Although lease obligations
typically do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation frequently is
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the lease obligation. However, certain lease obligations contain "non-
appropriation" clauses which provide that the issuer has no obligation to make
lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the lease property, disposition of the property
in the event of foreclosure might prove difficult.
Federal tax legislation has limited and may continue to limit the types and
volume of bonds the interest on which qualifies for a Federal income tax
exemption. As a result, this legislation and legislation that may be enacted in
the future may affect the availability of New Jersey Municipal Bonds and
Municipal Bonds for investment by the Fund.
OPTIONS AND FUTURES TRANSACTIONS
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The investment policies with
respect to the hedging transactions of the Fund are not fundamental policies and
may be modified by the Board of Directors of the Fund without the approval of
the Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to New Jersey Municipal Bonds and Municipal Bonds it owns,
thereby giving the holder of the option the right to buy the underlying security
covered by the option from the Fund at the stated exercise price until the
option expires. The Fund writes only covered call options, which means that so
long as the Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option. The Fund may not write covered call
options on underlying securities in an amount exceeding 15% of the market value
of its total assets.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the
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<PAGE> 56
Fund limits its opportunity to profit from an increase in the market value of
the underlying security above the exercise price of the option for as long as
the Fund's obligation as a writer continues. Covered call options may serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put expires. The
amount of any appreciation in the value of the underlying security will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Prior to its expiration, a put option may be sold in
a closing sale transaction; profit or loss from the sale will depend on whether
the amount received is more or less than the premium paid for the put option
plus the related transaction costs. A closing sale transaction cancels out the
Fund's position as the purchaser of an option by means of an offsetting sale of
an identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities that it
intends to purchase. The Fund will not purchase options on securities if, as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Financial Futures Contracts and Options. The Fund is authorized to
purchase and sell certain financial futures contracts and options thereon solely
for the purpose of hedging its investments in New Jersey Municipal Bonds and
Municipal Bonds against declines in value and hedging against increases in the
cost of securities it intends to purchase. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract to
take delivery of the type of financial instrument covered by the contract or, in
the case of index-based financial futures contracts, to make and accept a cash
settlement, at a specific future time for a specified price. A sale of financial
futures contracts may provide a hedge against a decline in the value of
portfolio securities because such depreciation may be offset, in whole or in
part, by an increase in the value of the position in the financial futures
contracts. A purchase of financial futures contracts may provide a hedge against
an increase in the cost of securities intended to be purchased because such
appreciation may be offset, in whole or in part, by an increase in the value of
the position in the financial futures contracts.
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker equal to
approximately 5% of the contract amount must be deposited with the broker. This
amount is known as initial margin. Subsequent payments to and from the broker,
called variation margin, are made on a daily basis as the price of the financial
futures contract fluctuates making the long and short positions in the financial
futures contract more or less valuable.
The Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value of
40 large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging New Jersey Municipal
Bonds and Municipal Bonds which the Fund holds or anticipates purchasing against
adverse changes in interest rates. The Fund also may purchase and sell financial
futures contracts on U.S. Government securities and purchase and sell put and
call options on such financial futures contracts for such hedging purposes. With
respect to U.S. Government securities, currently there are financial futures
contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA
Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available, if
the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the New
Jersey Municipal Bonds and Municipal Bonds in which the Fund invests to make
such hedging appropriate.
Over-the-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets. In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation) with
standard-
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<PAGE> 57
ized strike prices and expiration dates. Over-the-counter options transactions
("OTC options") are two-party contracts with prices and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of at least $50
million. Certain OTC options and assets used to cover OTC options written by the
Fund may be considered to be illiquid. The illiquidity of such options or assets
may prevent a successful sale of such options or assets, result in a delay of
sale, or reduce the amount of proceeds that might otherwise be realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the security
that is the subject of the hedge. If the price of the financial futures contract
moves more or less than the price of the security that is the subject of the
hedge, the Fund will experience a gain or loss that will not be completely
offset by movements in the price of such security. There is a risk of imperfect
correlation where the securities underlying financial futures contracts have
different maturities, ratings, geographic compositions or other characteristics
than the security being hedged. In addition, the correlation may be affected by
additions to or deletions from the index that serves as a basis for a financial
futures contract. Finally, in the case of financial futures contracts on U.S.
Government securities and options on such financial futures contracts, the
anticipated correlation of price movements between the U.S. Government
securities underlying the futures or options and New Jersey Municipal Bonds and
Municipal Bonds may be adversely affected by economic, political, legislative or
other developments which have a disparate impact on the respective markets for
such securities.
Under regulations of the Commodity Futures Trading Commission (the "CFTC"),
the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell financial futures contracts and options thereon (i) for bona
fide hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes if,
immediately thereafter, the sum of the amount of initial margin deposits on the
Fund's existing futures positions and option premiums entered into for
non-hedging purposes does not exceed 5% of the market value of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any such transactions. Margin deposits may consist of cash
or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a financial futures contract, or writes a put
option or purchases a call option thereon, it will maintain an amount of cash,
cash equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian so that the
amount so segregated plus the amount of initial and variation margin held in the
account of its broker equals the market value of the financial futures contract,
thereby ensuring that the use of such financial futures contract is unleveraged.
Certain risks are involved in options and futures transactions. The
Investment Adviser believes, however, that, because the Fund will engage in
options and futures transactions only for hedging purposes, the Fund's options
and futures portfolio strategies will not subject the Fund to those risks
associated with speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to New Jersey
Municipal Bond or Municipal Bond options may be limited, and it is impossible to
predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures. There can be no assurance,
however, that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an options or futures transaction. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. There is also the risk of
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<PAGE> 58
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a broker with which the Fund has an open position in an option or financial
futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges that limit the amount of fluctuation in a financial futures contract
price during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
reached or exceeded the daily limit on a number of consecutive trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize a
loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions from
time to time and may not necessarily be engaging in hedging transactions when
movements in interest rates occur. The Fund is not required to enter into
hedging transactions and may not do so.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may
not be changed without the approval of the holders of a majority of the Fund's
outstanding shares of common stock and outstanding shares of AMPS and any other
preferred stock, voting as a single class, and the majority of the outstanding
shares of AMPS and any other preferred stock, voting as a separate class (which
for this purpose and under the 1940 Act means the lesser of (i) 67% of the
shares of each class of capital stock represented at a meeting at which more
than 50% of the outstanding shares of each class of capital stock are
represented or (ii) more than 50% of the outstanding shares of each class of
capital stock). The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by
Section 18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase New
Jersey Municipal Bonds, Municipal Bonds and other debt securities and enter
into repurchase agreements in accordance with is investment objective,
policies and limitations.
6. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors without shareholder approval, provide that the
Fund may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities
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<PAGE> 59
of other investment companies except if immediately thereafter not more
than (i) 3% of the total outstanding voting stock of such company is owned
by the Fund, (ii) 5% of the Fund's total assets, taken at market value,
would be invested in any one such company, (iii) 10% of the Fund's total
assets, taken at market value, would be invested in such securities, and
(iv) the Fund, together with other investment companies having the same
investment adviser and companies controlled by such companies, owns not
more than 10% of the total outstanding stock of any one closed-end
investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except
as may be necessary in connection with borrowings mentioned in investment
restriction (3) above or except as may be necessary in connection with
transactions in financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that the Fund may
write, purchase and sell options and futures on New Jersey Municipal Bonds,
Municipal Bonds, U.S. Government obligations and related indices or
otherwise in connection with bona fide hedging activities and may purchase
and sell Call Rights to require mandatory tender for the purchase of
related New Jersey Municipal Bonds and Municipal Bonds.
If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
For so long as shares of AMPS are rated by Moody's, the Fund will not
change these additional investment restrictions unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the rating then assigned to the shares of AMPS by Moody's.
The Fund has no intention to file a voluntary application for relief under
Federal bankruptcy law or any similar application under state law for so long as
the Fund is solvent and does not foresee becoming insolvent.
The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by Merrill Lynch & Co. ("ML & Co."). Because of the affiliation of
Merrill Lynch with the Investment Adviser, the Fund is prohibited from engaging
in certain transactions involving Merrill Lynch except pursuant to an exemptive
order or otherwise in compliance with the provisions of the 1940 Act and the
rules and regulations thereunder. Included among such restricted transactions
will be purchases from or sales to Merrill Lynch of securities in transactions
in which it acts as principal. An exemptive order has been obtained that permits
the Fund to effect principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities subject to conditions set forth in such order.
The Fund may consider in the future requesting an order permitting other
principal transactions with Merrill Lynch, but there can be no assurance that
such application will be made and, if made, that such order would be granted.
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the back of the prospectus.
The AMPS of each series will be shares of preferred stock that entitle
their holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that may
vary for the successive Dividend Periods for each such series. After the Initial
Dividend Period, each Subsequent Dividend Period for each series of AMPS
generally will be a 7-Day Dividend Period; provided, however, that prior to any
Auction, the Fund may elect, subject to certain limitations described herein,
upon giving notice to holders thereof, a Special Dividend Period. The Applicable
Rate for a particular Dividend Period will be determined by an Auction conducted
on the Business Day before the start of such Dividend
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<PAGE> 60
Period. Beneficial Owners and Potential Beneficial Owners of shares of AMPS may
participate in Auctions therefor, although, except in the case of a Special
Dividend Period, Beneficial Owners desiring to continue to hold all of their
shares of AMPS regardless of the Applicable Rate resulting from Auctions need
not participate. For an explanation of Auctions and the method of determining
the Applicable Rate, see Appendix E -- "Auction Procedures."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of AMPS of each series will be represented by
one or more certificates registered in the name of the nominee of the Securities
Depository (initially expected to be Cede), and no person acquiring shares of
AMPS will be entitled to receive a certificate representing such shares. See
Appendix E -- "Auction Procedures." As a result, the nominee of the Securities
Depository is expected to be the sole holder of record of the shares of AMPS.
Accordingly, each purchaser of AMPS must rely on (i) the procedures of the
Securities Depository and, if such purchaser is not a member of the Securities
Depository, such purchaser's Agent Member, to receive dividends, distributions
and notices and to exercise voting rights (if and when applicable) and (ii) the
records of the Securities Depository and, if such purchaser is not a member of
the Securities Depository, such purchaser's Agent Member, to evidence its
beneficial ownership of shares of AMPS.
When issued and sold, the shares of AMPS will have a liquidation preference
of $25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) and will be fully paid and non-assessable.
See "Description of AMPS -- Liquidation Rights" in the prospectus. The shares of
AMPS will not be convertible into shares of common stock or other capital stock
of the Fund, and the holders thereof will have no preemptive rights. The shares
of AMPS of each series will not be subject to any sinking fund but will be
subject to redemption at the option of the Fund at the Optional Redemption Price
on any Dividend Payment Date for such series (except during the Initial Dividend
Period and during a Non-Call Period) and, under certain circumstances, will be
subject to mandatory redemption by the Fund at the Mandatory Redemption Price
stated in the prospectus. See "Description of AMPS -- Redemption" in the
prospectus.
In addition to serving as the Auction Agent in connection with the Auction
Procedures described in the prospectus, IBJ Whitehall Bank & Trust Company will
be the transfer agent, registrar, dividend disbursing agent and redemption agent
for the shares of AMPS. The Auction Agent, however, will serve merely as the
agent of the Fund, acting in accordance with the Fund's instructions, and will
not be responsible for any evaluation or verification of any matters certified
to it.
Except in an Auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any shares of AMPS so long
as the Fund is current in the payment of dividends on AMPS and on any other
capital stock of the Fund ranking on a parity with the AMPS with respect to the
payment of dividends or upon liquidation.
The following supplements the description of the terms of the shares of
AMPS set forth in the prospectus. This description does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Fund's Charter and Articles Supplementary, including the provisions thereof
establishing the AMPS. The Fund's Charter and the form of Articles Supplementary
establishing the terms of the AMPS have been filed as exhibits to the
Registration Statement of which this statement of additional information is a
part.
DIVIDENDS
General. The holders of shares of each series of AMPS will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund, out of
funds legally available therefor, cumulative cash dividends on their shares, at
the Applicable Rate determined as set forth below under "Determination of
Dividend Rate," payable on the respective dates set forth below. Dividends on
the shares of AMPS so declared and payable shall be paid (i) in preference to
and in priority over any dividends so declared and payable on the Common Stock,
and (ii) to the extent permitted under the Code and to the extent available, out
of net tax-exempt income earned on the Fund's investments. Generally, dividends
on shares of AMPS, to the extent that they are derived from interest paid on
Municipal Bonds, will be exempt from Federal income taxes, subject to possible
application of the alternative minimum tax. See "Taxes."
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<PAGE> 61
Notification of Dividend Period. In determining whether the Fund should
issue a Notice of Special Dividend for a series of AMPS, the Broker-Dealers will
consider (i) existing short-term and long-term market rates and indices of such
short-term and long-term rates, (ii) existing market supply and demand for
short-term and long-term securities, (iii) existing yield curves for short-term
and long-term securities comparable to the AMPS, (iv) industry and financial
conditions which may affect the AMPS, (v) the investment objective of the Fund
and (vi) the Dividend Periods and dividend rates at which current and potential
beneficial holders of the AMPS would remain or become beneficial holders. If the
Broker-Dealers shall not give the Fund and the Auction Agent a Response by such
second Business Day or if the Response states that given the factors set forth
above it is not advisable that the Fund give a Notice of Special Dividend Period
for the AMPS, the Fund may not give a Notice of Special Dividend Period in
respect of such Request for Special Dividend Period. In the event the Response
indicates that it is advisable that the Fund give a Notice of Special Dividend
Period for the AMPS, the Fund, by no later than the second Business Day prior to
such Auction Date, may give a notice (a "Notice of Special Dividend Period") to
the Auction Agent, the Securities Depository and each Broker-Dealer, which
notice will specify (i) the duration of the Special Dividend Period, (ii) the
Optional Redemption Price as specified in the related Response and (iii) the
Specific Redemption Provisions, if any, as specified in the related Response.
The Fund also shall provide a copy of such Notice of Special Dividend Period to
Moody's and S&P. The Fund shall not give a Notice of Special Dividend Period,
and, if such Notice of Special Dividend Period shall have been given already,
shall give telephonic and written notice of its revocation (a "Notice of
Revocation") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the Business Day prior to the relevant Auction Date if
(x) either the 1940 Act AMPS Asset Coverage is not satisfied or the Fund shall
fail to maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value at least equal to the AMPS Basic Maintenance Amount,
in each case on each of the two Valuation Dates immediately preceding the
Business Day prior to the relevant Auction Date on an actual basis and on a pro
forma basis giving effect to the proposed Special Dividend Period (using as a
pro forma dividend rate with respect to such Special Dividend Period the
dividend rate which the Broker-Dealers shall advise the Fund is an approximately
equal rate for securities similar to the AMPS with an equal dividend period),
provided that, in calculating the aggregate Discounted Value of Moody's Eligible
Assets for this purpose, the Moody's Exposure Period shall be deemed to be one
week longer, (y) sufficient funds for the payment of dividends payable on the
immediately succeeding Dividend Payment Date have not been irrevocably deposited
with the Auction Agent by the close of business on the third Business Day
preceding the related Auction Date or (z) the Broker-Dealers jointly advise the
Fund that, after consideration of the factors listed above, they have concluded
that it is advisable to give a Notice of Revocation. The Fund also shall provide
a copy of such Notice of Revocation to Moody's and S&P. If the Fund is
prohibited from giving a Notice of Special Dividend Period as a result of the
factors enumerated in clause (x), (y) or (z) above or if the Fund gives a Notice
of Revocation with respect to a Notice of Special Dividend Period, the next
succeeding Dividend Period for that series will be a 7-Day Dividend Period. In
addition, in the event Sufficient Clearing Bids are not made in any Auction or
an Auction is not held for any reason, the next succeeding Dividend Period will
be a 7-Day Dividend Period, and the Fund may not again give a Notice of Special
Dividend Period (and any such attempted notice shall be null and void) until
Sufficient Clearing Bids have been made in an Auction with respect to a 7-Day
Dividend Period.
Non-Payment Period; Late Charge. A Non-Payment Period will commence if the
Fund fails to (i) declare, prior to the close of business on the second Business
Day preceding any Dividend Payment Date, for payment on or (to the extent
permitted as described below) within three Business Days after such Dividend
Payment Date to the persons who held such shares as of 12:00 noon, Eastern time,
on the Business Day preceding such Dividend Payment Date, the full amount of any
dividend on shares of AMPS payable on such Dividend Payment Date or (ii)
deposit, irrevocably in trust, in same-day funds, with the Auction Agent by
12:00 noon, Eastern time, (A) on such Dividend Payment Date the full amount of
any cash dividend on such shares (if declared) payable on such Dividend Payment
Date or (B) on any redemption date for shares of AMPS called for redemption, the
Mandatory Redemption Price per share of such AMPS or, in the case of an optional
redemption, the Optional Redemption Price per share. Such Non-Payment Period
will consist of the period commencing on and including the aforementioned
Dividend Payment Date or redemption date, as the case may be, and ending on and
including the Business Day on which, by 12:00 noon, Eastern time, all
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unpaid cash dividends and unpaid redemption prices shall have been so deposited
or otherwise shall have been made available to the applicable holders in
same-day funds, provided that a Non-Payment Period for any series of AMPS will
not end unless the Fund shall have given at least five days' but no more than 30
days' written notice of such deposit or availability to the Auction Agent, the
Securities Depository and all holders of shares of AMPS of such series.
Notwithstanding the foregoing, the failure by the Fund to deposit funds as
provided for by clauses (ii) (A) or (ii) (B) above within three Business Days
after any Dividend Payment Date or redemption date, as the case may be, in each
case to the extent contemplated below, shall not constitute a "Non-Payment
Period."
The Applicable Rate for each Dividend Period for shares of AMPS of any
series, commencing during a Non-Payment Period, will be equal to the Non-Payment
Period Rate; and each Dividend Period commencing after the first day of, and
during, a Non-Payment Period shall be a 7-Day Dividend Period. Any dividend on
shares of AMPS due on any Dividend Payment Date for such shares (if, prior to
the close of business on the second Business Day preceding such Dividend Payment
Date, the Fund has declared such dividend payable on such Dividend Payment Date
to the persons who held such shares as of 12:00 noon, Eastern time, on the
Business Day preceding such Dividend Payment Date) or redemption price with
respect to such shares not paid to such persons when due may be paid to such
persons in the same form of funds by 12:00 noon, Eastern time, on any of the
first three Business Days after such Dividend Payment Date or due date, as the
case may be, provided that such amount is accompanied by a late charge
calculated for such period of non-payment at the Non-Payment Period Rate applied
to the amount of such non-payment based on the actual number of days comprising
such period divided by 365. In the case of a willful failure of the Fund to pay
a dividend on a Dividend Payment Date or to redeem any shares of AMPS on the
date set for such redemption, the preceding sentence shall not apply and the
Applicable Rate for the Dividend Period commencing during the Non-Payment Period
resulting from such failure shall be the Non-Payment Period Rate. For the
purposes of the foregoing, payment to a person in same-day funds on any Business
Day at any time will be considered equivalent to payment to that person in New
York Clearing House (next-day) funds at the same time on the preceding Business
Day, and any payment made after 12:00 noon, Eastern time, on any Business Day
shall be considered to have been made instead in the same form of funds and to
the same person before 12:00 noon, Eastern time, on the next Business Day.
The Non-Payment Period Rate initially will be 200% of the applicable
Reference Rate (or 275% of such rate if the Fund has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend that net capital gains or other taxable income will be included in such
dividend on shares of AMPS), provided that the Board of Directors of the Fund
shall have the authority to adjust, modify, alter or change from time to time
the initial Non-Payment Period Rate if the Board of Directors of the Fund
determines and Moody's and S&P (and any Substitute Rating Agency in lieu of
Moody's or S&P in the event either of such parties shall not rate the AMPS)
advise the Fund in writing that such adjustment, modification, alteration or
change will not adversely affect their then-current ratings on the AMPS.
Restrictions on Dividends and Other Payments. For so long as any shares of
AMPS are outstanding, the Fund will not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or distribution paid
in shares of, or options, warrants or rights to subscribe for or purchase,
common stock or other stock, if any, ranking junior to shares of AMPS as to
dividends or upon liquidation) in respect of common stock or any other stock of
the Fund ranking junior to or on a parity with shares of AMPS as to dividends or
upon liquidation, or call for redemption, redeem, purchase or otherwise acquire
for consideration any shares of common stock or any other such junior stock
(except by conversion into or exchange for stock of the Fund ranking junior to
AMPS as to dividends and upon liquidation) or any such parity stock (except by
conversion into or exchange for stock of the Fund ranking junior to or on a
parity with AMPS as to dividends and upon liquidation), unless (A) immediately
after such transaction, the Fund would have S&P Eligible Assets and Moody's
Eligible Assets each with an aggregate Discounted Value equal to or greater than
the AMPS Basic Maintenance Amount, and the 1940 Act AMPS Asset Coverage (see
"Asset Maintenance" and "Redemption" below) would be satisfied, (B) full
cumulative dividends on shares of AMPS due on or prior to the date of the
transaction have been declared and paid or shall have been declared and
sufficient funds for the
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payment thereof deposited with the Auction Agent, (C) any Additional Dividend
required to be paid on or before the date of such declaration or payment has
been paid and (D) the Fund has redeemed the full number of shares of AMPS
required to be redeemed by any provision for mandatory redemption contained in
the Articles Supplementary.
ASSET MAINTENANCE
1940 Act AMPS Asset Coverage. The Fund will be required under the Articles
Supplementary to maintain, with respect to shares of AMPS, as of the last
Business Day of each month in which any shares of AMPS are outstanding, asset
coverage of at least 200% with respect to senior securities which are stock,
including the shares of AMPS (or such other asset coverage as in the future may
be specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are stock of a closed-end investment company as a condition of
paying dividends on its common stock) ("1940 Act AMPS Asset Coverage"). If the
Fund fails to maintain 1940 Act AMPS Asset Coverage and such failure is not
cured as of the last Business Day of the following month (the "1940 Act Cure
Date"), the Fund will be required under certain circumstances to redeem certain
of the shares of AMPS. See "Redemption" in the prospectus and below.
AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding,
the Fund will be required under the Articles Supplementary to maintain as of
each Business Day (a "Valuation Date") S&P Eligible Assets and Moody's Eligible
Assets each having in the aggregate a Discounted Value at least equal to the
AMPS Basic Maintenance Amount. If the Fund fails to meet such requirement as of
any Valuation Date and such failure is not cured on or before the sixth Business
Day after such Valuation Date (the "AMPS Basic Maintenance Cure Date"), the Fund
will be required under certain circumstances to redeem certain of the shares of
AMPS. Upon any failure to maintain the required Discounted Value, the Fund will
use its best efforts to alter the composition of its portfolio to reattain a
Discounted Value at least equal to the AMPS Basic Maintenance Amount on or prior
to the AMPS Basic Maintenance Cure Date. See "Redemption" in the prospectus and
below.
The AMPS Basic Maintenance Amount as of any Valuation Date is defined as
the dollar amount equal to (i) the sum of (A) the product of the number of
shares of AMPS outstanding on such Valuation Date multiplied by the sum of
$25,000 and any applicable redemption premium attributable to the designation of
a Premium Call Period; (B) the aggregate amount of cash dividends (whether or
not earned or declared) that will have accumulated for each share of AMPS
outstanding to (but not including) the end of the current Dividend Period that
follows such Valuation Date in the event the then-current Dividend Period will
end within 49 calendar days of such Valuation Date or through the 49th day after
such Valuation Date in the event the then-current Dividend Period for each
series of AMPS will not end within 49 calendar days of such Valuation Date; (C)
in the event the then-current Dividend Period will end within 49 calendar days
of such Valuation Date, the aggregate amount of cash dividends that would
accumulate at the Maximum Applicable Rate applicable to a Dividend Period of 28
or fewer days on any shares of AMPS outstanding from the end of such Dividend
Period through the 49th day after such Valuation Date, multiplied by the larger
of the Moody's Volatility Factor and the S&P Volatility Factor determined from
time to time by Moody's and S&P, respectively (except that if such Valuation
Date occurs during a Non-Payment Period, the cash dividend for purposes of
calculation would accumulate at the then-current Non-Payment Period Rate); (D)
the amount of anticipated Fund expenses for the 90 days subsequent to such
Valuation Date (including any premiums payable with respect to a Policy); (E)
the amount of the Fund's Maximum Potential Additional Dividend Liability as of
such Valuation Date; and (F) any current liabilities as of such Valuation Date
to the extent not reflected in any of (i) (A) through (i) (E) (including,
without limitation, and immediately upon determination, any amounts due and
payable by the Fund pursuant to repurchase agreements, any amounts payable for
New Jersey Municipal Bonds or Municipal Bonds purchased as of such Valuation
Date) less (ii) either (A) the Discounted Value of any Fund assets, or (B) the
face value of any of the Fund's assets if such assets mature prior to or on the
date of redemption of AMPS or payment of a liability and are either securities
issued or guaranteed by the United States Government or Deposit Securities, in
both cases irrevocably deposited by the Fund for the payment of the amount
needed to redeem shares of AMPS subject to redemption or to satisfy any of (i)
(B) through (i) (F). For Moody's and S&P the Fund shall include as a
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liability an amount calculated semi-annually equal to 150% of the estimated cost
of obtaining other insurance guaranteeing the timely payment of interest on a
Moody's Eligible Asset or S&P Eligible Asset and principal thereof to maturity
with respect to Moody's Eligible Assets and S&P Eligible Assets that (i) are
covered by a Policy which provides the Fund with the option to obtain such other
insurance and (ii) are discounted by a Moody's Discount Factor or S&P Discount
Factor, as the case may be, determined by reference to the insurance
claims-paying ability rating of the issuer of such Policy. For purposes of the
foregoing, "Maximum Potential Additional Dividend Liability," as of any
Valuation Date, means the aggregate amount of Additional Dividends that would be
due if the Fund were to make Retroactive Taxable Allocations, with respect to
any fiscal year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable income earned by the
Fund, as of the end of the calendar month immediately preceding such Valuation
Date and assuming such Additional Dividends are fully taxable.
The Discount Factors and guidelines for determining the market value of the
Fund's portfolio holdings have been based on criteria established in connection
with rating the AMPS. These factors include, but are not limited to, the
sensitivity of the market value of the relevant asset to changes in interest
rates, the liquidity and depth of the market for the relevant asset, the credit
quality of the relevant asset (for example, the lower the rating of a debt
obligation, the higher the related discount factor) and the frequency with which
the relevant asset is marked to market. In no event shall the Discounted Value
of any asset of the Fund exceed its unpaid principal balance or face amount as
of the date of calculation. The Discount Factor relating to any asset of the
Fund and the AMPS Basic Maintenance Amount, the assets eligible for inclusion in
the calculation of the Discounted Value of the Fund's portfolio and certain
definitions and methods of calculation relating thereto may be changed from time
to time by the Fund, without shareholder approval, but only in the event the
Fund receives written confirmation from S&P, Moody's and any Substitute Rating
Agency that any such changes would not impair the ratings then assigned to the
shares of AMPS by S&P or Moody's or any Substitute Rating Agency.
On or before the third Business Day after a Valuation Date on which the
Fund fails to maintain S&P Eligible Assets and Moody's Eligible Assets each with
an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount, the Fund is required to deliver to the Auction Agent,
Moody's and S&P a report with respect to the calculation of the AMPS Basic
Maintenance Amount and the value of its portfolio holdings as of the date of
such failure (an "AMPS Basic Maintenance Report"). Additionally, on or before
the third Business Day after the first day of a Special Dividend Period, the
Fund will deliver an AMPS Basic Maintenance Report to S&P and the Auction Agent.
The Fund also will deliver an AMPS Basic Maintenance Report as of the
twenty-fifth day of the last month of each fiscal quarter of the Fund (or, if
such day is not a Business Day, the next succeeding Business Day) on or before
the third Business Day after such day. Within ten Business Days after delivery
of such report relating to the twenty-first day of the last month of each fiscal
quarter of the Fund, the Fund will deliver a letter prepared by the Fund's
independent accountants regarding the accuracy of the calculations made by the
Fund in its most recent AMPS Basic Maintenance Report. Also, on or before 5:00
p.m., Eastern time, on the first Business Day after shares of common stock are
repurchased by the Fund, the Fund will complete and deliver to S&P and Moody's
an AMPS Basic Maintenance Report as of the close of business on such date that
common stock is repurchased. If any such letter prepared by the Fund's
independent accountants shows that an error was made in the most recent AMPS
Basic Maintenance Report, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund.
REDEMPTION
Mandatory Redemption. The number of shares of AMPS to be redeemed will be
equal to the lesser of (a) the minimum number of shares of AMPS the redemption
of which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, together with all other shares of the preferred stock
subject to redemption or retirement, would result in the Fund having S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or satisfaction
of the 1940 Act AMPS Asset Coverage, as the case may be, on such Cure Date
(provided that, if there is no such minimum number of shares the redemption of
which would have
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such result, all shares of AMPS then outstanding will be redeemed), and (b) the
maximum number of shares of AMPS, together with all other shares of preferred
stock subject to redemption or retirement, that can be redeemed out of funds
expected to be legally available therefor on such redemption date. In
determining the number of shares of AMPS required to be redeemed in accordance
with the foregoing, the Fund shall allocate the number required to be redeemed
which would result in the Fund having S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount or satisfaction of the 1940 Act AMPS Asset Coverage, as
the case may be, pro rata among shares of AMPS and other preferred stock subject
to redemption pursuant to provisions similar to those set forth below; provided
that, shares of AMPS which may not be redeemed at the option of the Fund due to
the designation of a Non-Call Period applicable to such shares (A) will be
subject to mandatory redemption only to the extent that other shares are not
available to satisfy the number of shares required to be redeemed and (B) will
be selected for redemption in an ascending order of outstanding number of days
in the Non-Call Period (with shares with the lowest number of days to be
redeemed first) and by lot in the event of shares having an equal number of days
in such Non-Call Period. The Fund is required to effect such a mandatory
redemption not later than 35 days after such Cure Date, except that if the Fund
does not have funds legally available for the redemption of all of the required
number of shares of AMPS which are subject to mandatory redemption or the Fund
otherwise is unable to effect such redemption on or prior to 35 days after such
Cure Date, the Fund will redeem those shares of AMPS which it was unable to
redeem on the earliest practicable date on which it is able to effect such
redemption.
Notice of Redemption. If shares of AMPS of any series are to be redeemed,
a notice of redemption will be mailed to each record holder of such shares of
AMPS (initially Cede as nominee of the Securities Depository) and to the Auction
Agent not less than 17 nor more than 60 days prior to the date fixed for the
redemption thereof. Each notice of redemption will include a statement setting
forth: (i) the redemption date, (ii) the aggregate number of shares of AMPS of
such series are to be redeemed, (iii) the redemption price, (iv) the place or
places where shares of AMPS of such series are to be surrendered for payment of
the redemption price, (v) a statement that dividends on the shares to be
redeemed will cease to accumulate on such redemption date (except that holders
may be entitled to Additional Dividends) and (vi) the provision of the Articles
Supplementary pursuant to which such shares are being redeemed. The notice also
will be published in The Wall Street Journal. No defect in the notice of
redemption or in the mailing or publication thereof will affect the validity of
the redemption proceedings, except as required by applicable law.
In the event that less than all of the outstanding shares of any series of
AMPS are to be redeemed, the shares to be redeemed will be selected by lot or
such other method as the Fund shall deem fair and equitable, and the results
thereof will be communicated to the Auction Agent. The Auction Agent will give
notice to the Securities Depository, whose nominee will be the record holder of
all shares of AMPS, and the Securities Depository will determine the number of
shares to be redeemed from the account of the Agent Member of each Existing
Holder. Each Agent Member will determine the number of shares to be redeemed
from the account of each Existing Holder for which it acts as agent. An Agent
Member may select for redemption shares from the accounts of some Existing
Holders without selecting for redemption any shares from the accounts of other
Existing Holders. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the shares, the
particular shares to be redeemed shall be selected by the Fund by lot or by such
other method as the Fund shall deem fair and equitable.
If the Fund gives notice of redemption, and concurrently or thereafter
deposits in trust with the Auction Agent, or segregates in an account at the
Fund's custodian bank for the benefit of the Auction Agent, Deposit
Securities(with a right of substitution) having an aggregate Discounted Value
(utilizing in the case of S&P and S&P Exposure Period of 22 Business Days) equal
to the redemption payment for the shares of AMPS as to which notice of
redemption has been given, with irrevocable instructions and authority to pay
the redemption price to the record holders thereof, then upon the date of such
deposit or, if no such deposit is made, upon such date fixed for redemption
(unless the Fund shall default in making payment of the redemption price), all
rights of the holders of such shares called for redemption will cease and
terminate, except the right of such holders to receive the redemption price
thereof and any Additional Dividends, but without interest, and such shares no
longer will be deemed to be outstanding. The Fund will be entitled to
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receive, from time to time, the interest, if any, earned on such Deposit
Securities deposited with the Auction Agent, and the holders of any shares so
redeemed will have no claim to any such interest. Any funds so deposited which
are unclaimed at the end of one year from such redemption date will be repaid,
upon demand, to the Fund, after which the holders of the shares of AMPS of such
series so called for redemption may look only to the Fund for payment thereof.
So long as any shares of AMPS are held of record by the nominee of the
Securities Depository (initially Cede), the redemption price for such shares
will be paid on the redemption date to the nominee of the Securities Depository.
The Securities Depository's normal procedures now provide for it to distribute
the amount of the redemption price to Agent Members who, in turn, are expected
to distribute such funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no shares of
AMPS shall be subject to optional redemption (i) unless all dividends in arrears
on the outstanding shares of AMPS, and all capital stock of the Fund ranking on
a parity with the AMPS with respect to the payment of dividends or upon
liquidation, have been or are being contemporaneously paid or declared and set
aside for payment and (ii) if redemption thereof would result in the Fund's
failure to maintain Moody's Eligible Assets or S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount.
VOTING RIGHTS
In connection with the election of the Fund's directors, holders of shares
of AMPS and any other preferred stock, voting as a separate class, shall be
entitled at all times to elect two of the Fund's directors, and the remaining
directors will be elected by holders of shares of common stock and shares of
AMPS and any other preferred stock, voting together as a single class. In
addition, if at any time dividends on outstanding shares of AMPS shall be unpaid
in an amount equal to at least two full years' dividends thereon or if at any
time holders of any shares of preferred stock are entitled, together with the
holders of AMPS, to elect a majority of the directors of the Fund under the 1940
Act, then the number of directors constituting the Board of Directors
automatically shall be increased by the smallest number that, when added to the
two directors elected exclusively by the holders of shares of AMPS and any other
preferred stock as described above, would constitute a majority of the Board of
Directors as so increased by such smallest number, and at a special meeting of
shareholders which will be called and held as soon as practicable, and at all
subsequent meetings at which directors are to be elected, the holders of shares
of AMPS and any other preferred stock, voting as a separate class, will be
entitled to elect the smallest number of additional directors that, together
with the two directors which such holders in any event will be entitled to
elect, constitutes a majority of the total number of directors of the Fund as so
increased. The terms of office of the persons who are directors at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment in full, all dividends payable on all outstanding shares
of AMPS and any other preferred stock for all past Dividend Periods, the
additional voting rights of the holders of shares of AMPS and any other
preferred stock as described above shall cease, and the terms of office of all
of the additional directors elected by the holders of shares of AMPS and any
other preferred stock (but not of the directors with respect to whose election
the holders of common stock were entitled to vote or the two directors the
holders of shares of AMPS and any other preferred stock have the right to elect
in any event) will terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares of AMPS and any other preferred stock, voting as a
separate class, will be required to (i) authorize, create or issue any class or
series of stock ranking prior to the AMPS or any other series of preferred stock
with respect to the payment of dividends or the distribution of assets on
liquidation, or (ii) amend, alter or repeal the provisions of the Articles of
Incorporation, whether by merger, consolidation or otherwise, so as to adversely
affect any of the contract rights expressly set forth in the Articles of
Incorporation of holders of shares of AMPS or any other preferred stock. To the
extent permitted under the 1940 Act, in the event shares of more than one series
of AMPS are outstanding, the Fund shall not approve any of the actions set forth
in clause (i) or (ii) which adversely affects the contract rights expressly set
forth in the Articles of Incorporation of a holder of shares of a series of AMPS
differently than those of a holder of shares of any other series of AMPS without
the affirmative vote of at least a majority of votes entitled to be cast by
holders of the shares of AMPS
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of each series adversely affected and outstanding at such time (each such
adversely affected series voting separately as a class). The Board of Directors,
however, without shareholder approval, may amend, alter or repeal any or all of
the various rating agency guidelines described herein in the event the Fund
receives confirmation from the rating agencies that any such amendment,
alteration or repeal would not impair the ratings then assigned to shares of
AMPS. Unless a higher percentage is provided for under "Description of Capital
Stock -- Certain Provisions in the Articles of Incorporation" in the prospectus,
the affirmative vote of a majority of the votes entitled to be cast by holders
of outstanding shares of AMPS and any other preferred stock, voting as a
separate class, will be required to approve any plan of reorganization
(including bankruptcy proceedings) adversely affecting such shares or any action
requiring a vote of security holders under Section 13(a) of the 1940 Act
including, among other things, changes in the Fund's investment objective or
changes in the investment restrictions described as fundamental policies under
"Investment Objective and Policies." The class vote of holders of shares of AMPS
and any other preferred stock described above in each case will be in addition
to a separate vote of the requisite percentage of shares of common stock and
shares of AMPS and any other preferred stock, voting together as a single class,
necessary to authorize the action in question.
The foregoing voting provisions will not apply to any series of AMPS if, at
or prior to the time when the act with respect to which such vote otherwise
would be required shall be effected, such shares shall have been (i) redeemed or
(ii) called for redemption and sufficient funds shall have been deposited in
trust to effect such redemption.
THE AUCTION
AUCTION AGENT AGREEMENT
The Auction Agent will act as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for any
error of judgment made, by it in the performance of its duties under the Auction
Agent Agreement, and will not be liable for any error of judgment made in good
faith unless the Auction Agent shall have been negligent in ascertaining the
pertinent facts. Pursuant to the Auction Agent Agreement, the Fund is required
to indemnify the Auction Agent for certain losses and liabilities incurred by
the Auction Agent without negligence or bad faith on its part in connection with
the performance of its duties under such agreement.
The Auction Agent may terminate the Auction Agent Agreement upon notice to
the Fund, which termination may be no earlier than 60 days following delivery of
such notice. If the Auction Agent resigns, the Fund will use its best efforts to
enter into an agreement with a successor Auction Agent containing substantially
the same terms and conditions as the Auction Agent Agreement. The Fund may
terminate the Auction Agent Agreement, provided that prior to such termination
the Fund shall have entered into such an agreement with respect thereto with a
successor Auction Agent.
BROKER-DEALER AGREEMENTS
The Auctions require the participation of one or more broker-dealers. A
Broker-Dealer Agreement may be terminated by the Auction Agent or a
Broker-Dealer on five days' notice to the other party, provided that the
Broker-Dealer Agreement with Merrill Lynch may not be terminated without the
prior written consent of the Fund, which consent may not be unreasonably
withheld.
AUCTION PROCEDURES
Separate auctions will be conducted for each series of AMPS. The Auction
Procedures are set forth in Appendix E to this statement of additional
information. The Settlement Procedures to be used with respect to Auctions are
set forth in Appendix D to this statement of additional information.
15
<PAGE> 68
RATING AGENCY GUIDELINES
S&P AAA RATING GUIDELINES
The Discounted Value of the Fund's S&P Eligible Assets is calculated on
each Valuation Date. See "Description of AMPS -- Asset Maintenance -- AMPS Basic
Maintenance Amount." S&P Eligible Assets include cash, Receivables for New
Jersey Municipal Bonds Sold (as defined below) and New Jersey Municipal Bonds or
Municipal Bonds eligible for consideration under S&P's current guidelines. For
purposes of calculating the Discounted Value of the Fund's portfolio under
current S&P guidelines, the fair market value of New Jersey Municipal Bonds or
Municipal Bonds eligible for consideration under such guidelines must be
discounted by the applicable S&P Discount Factor set forth in the table below.
The Discounted Value of a New Jersey Municipal Bond or Municipal Bond eligible
for consideration under S&P guidelines is the fair market value thereof divided
by the S&P Discount Factor. The S&P Discount Factor used to discount a
particular New Jersey Municipal Bond or Municipal Bond will be determined by
reference to (a)(i) the rating by S&P, Moody's or Fitch on such Bond or (ii) in
the event the New Jersey Municipal Bond is insured under a Policy and the terms
of the Policy permit the Fund, at its option, to obtain other permanent
insurance guaranteeing the timely payment of interest on such New Jersey
Municipal Bond and principal thereof to maturity, the S&P insurance
claims-paying ability rating of the issuer of the Policy or (iii) in the event
the New Jersey Municipal Bond is insured under an insurance policy which
guarantees the timely payment of interest on such New Jersey Municipal Bond and
principal thereof to maturity, the S&P insurance claims-paying ability rating of
the issuer of the insurance policy and (b) the S&P Exposure Period. The S&P
Exposure Period is the maximum period of time following a Valuation Date,
including the Valuation Date and the AMPS Basic Maintenance Cure Date, that the
Fund has to cure any failure to maintain, as of such Valuation Date, a
Discounted Value for its portfolio at least equal to the AMPS Basic Maintenance
Amount.
S&P Discount Factors applicable to New Jersey Municipal Bonds for a range
of S&P Exposure Periods are set forth below:
<TABLE>
<CAPTION>
S&P DISCOUNT FACTORS RATING C
--------------------------------
EXPOSURE PERIOD AAA AA A BBB
--------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
45 Business Days......................................... 202% 207% 222% 262%
25 Business Days......................................... 182 187 202 242
10 Business Days......................................... 167 172 187 227
7 Business Days......................................... 162 167 182 222
3 Business Days......................................... 142 147 162 202
</TABLE>
Since the S&P Exposure Period currently applicable to the Fund is seven
Business Days, the S&P Discount Factors currently applicable to Municipal Bonds
eligible for consideration under S&P guidelines will be determined by reference
to the factors set forth opposite the exposure period line entitled "7 Business
Days." Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
New Jersey Municipal Bonds will be 115%, so long as such New Jersey Municipal
Bonds are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable in 30 days or less, or 120% so long as such New Jersey Municipal
Bonds are rated A-1 or SP-1 by S&P and mature or have a demand feature
exercisable in 30 days or less, or 125% if such New Jersey Municipal Bonds are
not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's or F-1+ by Fitch;
provided, however, such short-term New Jersey Municipal Bonds rated by Moody's
or Fitch but not rated by S&P having a demand feature exercisable in 30 days or
less must be backed by a letter of credit, liquidity facility or guarantee from
a bank or other financial institution having a short-term rating of at least
A-1+ from S&P; and further provided that such short-term New Jersey Municipal
Bonds rated by Moody's or Fitch but not rated by S&P may comprise no more than
50% of short-term New Jersey Municipal Bonds that qualify as S&P Eligible
Assets, (ii) the S&P Discount Factor for Receivables for New Jersey Municipal
Bonds Sold that are due in more than five Business Days from such Valuation Date
will be the S&P Discount Factor applicable to the New Jersey Municipal Bonds
sold, and (iii) no S&P Discount Factor will be applied to cash or to Receivables
for New Jersey Municipal Bonds Sold if such receivables are due within five
Business Days of such Valuation Date. "Receivables for New Jersey Municipal
Bonds Sold,"
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<PAGE> 69
for purposes of calculating S&P Eligible Assets as of any Valuation Date, means
the book value of receivables for New Jersey Municipal Bonds sold as of or prior
to such Valuation Date. The Fund may adopt S&P Discount Factors for Municipal
Bonds other than New Jersey Municipal Bonds provided that S&P advises the Fund
in writing that such action will not adversely affect its then current rating on
the AMPS. For purposes of the foregoing, Anticipation Notes rated SP-1 or, if
not rated by S&P, rated VMIG-1 by Moody's or F-1+ by Fitch, which do not mature
or have a demand feature exercisable in 30 days and which do not have a long-
term rating, shall be considered to be short-term New Jersey Municipal Bonds.
The S&P guidelines require certain minimum issue size and geographical
diversification and impose other requirements for purposes of determining S&P
Eligible Assets. In order to be considered S&P Eligible Assets, Municipal Bonds
must:
(i) be interest bearing and pay interest at least semi-annually;
(ii) be payable with respect to principal and interest in U.S.
dollars;
(iii) be publicly rated BBB or higher by S&P or, except in the case of
Anticipation Notes that are grant anticipation notes or bond anticipation
notes, which must be rated by S&P to be included in S&P Eligible Assets, if
not rated by S&P but rated by Moody's or Fitch, be rated at least A by
Moody's or Fitch, (provided that such Moody's-rated or Fitch-rated New
Jersey Municipal Bonds will be included in S&P Eligible Assets only to the
extent the fair market value of such New Jersey Municipal Bonds does not
exceed 50% of the aggregate fair market value of the S&P Eligible Assets.
For purposes of determining the S&P Discount Factors applicable to any such
Moody's-rated or Fitch-rated Municipal Bonds, such New Jersey Municipal
Bonds will be deemed to have an S&P rating that is one full rating category
lower than its Moody's rating or Fitch rating);
(iv) not be subject to a covered call or covered put option written by
the Fund;
(v) except for inverse floating obligations, not be part of a private
placement of Municipal Bonds; and
(vi) except for inverse floaters, be part of an issue with an original
issue size of at least $10 million or, if of an issue with an original
issue size below $10 million (but in no event below $5 million), be either
(a) issued by an issuer with a total of at least $25 million of securities
outstanding, or (b) rated at least A by S&P with all such New Jersey
Municipal Bonds not constituting more than 20% of the aggregate market
value of S&P Eligible Assets.
Notwithstanding the foregoing:
(i) New Jersey Municipal Bonds of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only to
the extent the fair market value of such Bonds does not exceed 10% of the
aggregate fair market value of the S&P Eligible Assets, provided that 2% is
added to the applicable S&P Discount Factor for every 1% by which the fair
market value of such New Jersey Municipal Bonds exceeds 5% of the aggregate
fair market value of the S&P Eligible Assets;
(ii) New Jersey Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the extent
the market value of such New Jersey Municipal Bonds does not exceed 25% of
the aggregate market value of S&P Eligible Assets, except that New Jersey
Municipal Bonds falling within the utility issue type category will be
broken down into three sub-categories (as described below) and such New
Jersey Municipal Bonds will be considered S&P Eligible Assets to the extent
the market value of such New Jersey Municipal Bonds in each such
sub-category does not exceed 25% of the aggregate market value of S&P
Eligible Assets, except that New Jersey Municipal Bonds falling within the
transportation issue type category will be broken down into two sub-
categories (as described below) and such New Jersey Municipal Bonds will be
considered S&P Eligible Assets to the extent the market value of such Bonds
in both sub-categories combined (as described below) does not exceed 40% of
the aggregate market value of S&P Eligible Assets and except that New
Jersey Municipal Bonds falling within the general obligation issue type
category will be considered S&P Eligible Assets to the extent the market
value of such New Jersey Municipal Bonds does not exceed 50%
17
<PAGE> 70
of the aggregate market value of S&P Eligible Assets. For purposes of the
issue type category requirement described above, New Jersey Municipal Bonds
will be classified within one of the following categories: health care
issues, housing issues, educational facilities issues, student loan issues,
transportation issues, industrial development bond issues, utility issues,
general obligation issues, lease obligations, escrowed bonds and other
issues not falling within one of the aforementioned categories. The general
obligation issue type category includes any issuer that is directly or
indirectly guaranteed by the State of New Jersey or its political
subdivisions. Utility issuers are included in the general obligation issue
type category if the issuer is directly or indirectly guaranteed by the
State of New Jersey or its political subdivisions. For purposes of the
issue type category requirement described above, New Jersey Municipal Bonds
in the utility issue type category will be classified within one of the
three following sub-categories: (1) electric, gas and combination issues
(if the combination issue includes an electric issue), (2) water and sewer
utilities and combination issues (if the combination issue does not include
an electric issue), and (3) irrigation, resource recovery, solid waste and
other utilities, provided that New Jersey Municipal Bonds included in this
sub-category (iii) must be rated by S&P in order to be included in S&P
Eligible Assets. For purposes of the issue type category requirement
described above, New Jersey Municipal Bonds in the transportation issue
type category will be classified within one of the two following sub-
categories: (i) streets and highways, toll roads, bridges and tunnels,
airports and multi-purpose port authorities (multiple revenue streams
generated by toll roads, airports, real estate, bridges), (ii) mass
transit, parking, seaports and others. Exposure to transportation
sub-category (i) in the preceding sentence is limited to 25% of the
aggregate market value of S&P Eligible Assets, provided, however, exposure
to transportation sub-category (ii) in the preceding sentence can exceed
the 25% limit to the extent that exposure to transportation sub-category
(ii) is reduced, for a total exposure up to and not exceeding 40% of the
aggregate market value of S&P Eligible Assets for the transportation issue
type category; and
(iii) New Jersey Municipal Bonds which are escrow bonds or defeased
bonds may compose up to 100% of the aggregate market value of S&P Eligible
Assets if such New Jersey Municipal Bonds initially are assigned a rating
by S&P in accordance with S&P's legal defeasance criteria or rerated by S&P
as economic defeased escrow bonds and assigned an AAA rating. New Jersey
Municipal Bonds may be rated as escrow bonds by another nationally
recognized rating agency or rerated as an escrow bond and assigned the
equivalent of an S&P AAA rating, provided that such equivalent rated New
Jersey Municipal Bonds are limited to 50% of the aggregate market value of
S&P Eligible Assets and are deemed to have an AA S&P rating for purposes of
determining the S&P Discount Factor applicable to such New Jersey Municipal
Bonds. The limitations on New Jersey Municipal Bonds of any one issuer in
clause (i) above is not applicable to escrow bonds, however, economically
defeased bonds that are either initially rated or rerated by S&P or another
nationally recognized rating agency and assigned the same rating level as
the issuer of the New Jersey Municipal Bonds will remain in its original
issue type category set forth in clause (ii) above. New Jersey Municipal
Bonds that are legally defeased and secured by securities issued or
guaranteed by the United States Government are not required to meet the
minimum issuance size requirement set forth above.
The Fund may include Municipal Bonds other than New Jersey Municipal Bonds
as S&P Eligible Assets pursuant to guidelines and restrictions to be established
by S&P, provided that S&P advises the Fund in writing that such action will not
adversely affect its then-current rating on the AMPS.
As discussed in the prospectus, the Fund may engage in options or futures
transactions. For so long as any shares of AMPS are rated by S&P, the Fund will
not purchase or sell financial futures contracts, write, purchase or sell
options on financial futures contracts or write put options (except covered put
options) or call options (except covered call options) on portfolio securities
unless it receives written confirmation from S&P that engaging in such
transactions will not impair the ratings then assigned to the shares of AMPS by
S&P, except that the Fund may purchase or sell financial futures contracts based
on the Bond Buyer Municipal Bond Index (the "Municipal Index") or United States
Treasury Bonds or Notes ("Treasury Bonds") and
18
<PAGE> 71
write, purchase or sell put and call options on such contracts (collectively
"S&P Hedging Transactions"), subject to the following limitations:
(i) the Fund will not engage in any S&P Hedging Transaction based on
the Municipal Index (other than transactions that terminate a financial
futures contract or option held by the Fund by the Fund's taking an
opposite position thereto ("Closing Transactions")), that would cause the
Fund at the time of such transaction to own or have sold the least of (A)
more than 1,000 outstanding financial futures contracts based on the
Municipal Index, (B) outstanding financial futures contracts based on the
Municipal Index exceeding in number 25% of the quotient of the fair market
value of the Fund's total assets divided by $1,000 or (C) outstanding
financial futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded financial futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) that would cause the Fund
at the time of such transaction to own or have sold the lesser of (A)
outstanding financial futures contracts based on Treasury Bonds exceeding
in number 50% of the quotient of the fair market value of the Fund's total
assets divided by $100,000 ($200,000 in the case of the two-year United
States Treasury Note) or (B) outstanding financial futures contracts based
on Treasury Bonds exceeding in number 10% of the average number of daily
traded financial futures contracts based on Treasury Bonds in the 30 days
preceding the time of effecting such transaction as reported by The Wall
Street Journal;
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract that the Fund owns or has sold or
any outstanding option thereon owned by the Fund in the event (A) the Fund
does not have S&P Eligible Assets with an aggregate Discounted Value equal
to or greater than the AMPS Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Fund is required to pay Variation Margin on the
second such Valuation Date;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract or option thereon in the month prior
to the delivery month under the terms of such financial futures contract or
option thereon unless the Fund holds the securities deliverable under such
terms; and
(v) when the Fund writes a financial futures contract or an option
thereon, it will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P) fixed-income securities in a
segregated account with the Fund's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in
the account of or on behalf of the Fund's broker with respect to such
financial futures contract or option equals the fair market value of the
financial futures contract or option, or, in the event the Fund writes a
financial futures contract or option thereon that requires delivery of an
underlying security, it shall hold such underlying security in its
portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets with a
Discounted Value that equals or exceeds the AMPS Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin or
Variation Margin shall be zero and the aggregate Discounted Value of S&P
Eligible Assets shall be reduced by an amount equal to (i) 30% of the aggregate
settlement value, as marked to market, of any outstanding financial futures
contracts based on the Municipal Index that are owned by the Fund plus (ii) 25%
of the aggregate settlement value, as marked to market, of any outstanding
financial futures contracts based on Treasury Bonds which contracts are owned by
the Fund.
MOODY'S "aaa" RATING GUIDELINES
The Discounted Value of the Fund's Moody's Eligible Assets is calculated on
each Valuation Date. See "Description of AMPS -- Asset Maintenance -- AMPS Basic
Maintenance Amount" herein. Moody's Eligible Assets include cash, Receivables
for New Jersey Municipal Bonds or Municipal Bonds (as defined below), and New
Jersey Municipal Bonds or Municipal Bonds eligible for consideration under
Moody's guidelines. For purposes of calculating the Discounted Value of the
Fund's portfolio under current Moody's
19
<PAGE> 72
guidelines, the fair market value of Municipal Bonds eligible for consideration
under such guidelines must be discounted by the applicable Moody's Discount
Factor set forth in the table below. The Discounted Value of a Municipal Bond
eligible for consideration under Moody's guidelines is the lower of par and the
quotient of the fair market value thereof divided by the Moody's Discount
Factor. The Moody's Discount Factor used to discount a particular New Jersey
Municipal Bond or Municipal Bond will be determined by reference to (a) (i) the
rating by Moody's or S&P on such Bond or (ii) in the event the Moody's Eligible
Asset is insured under a Policy and the terms of the Policy permit the Fund, at
its option, to obtain other insurance guaranteeing the timely payment of
interest on such Moody's Eligible Asset and principal thereof to maturity, the
Moody's insurance claims-paying ability rating of the issuer of the Policy or
(iii) in the event the Moody's Eligible Asset is insured under an insurance
policy which guarantees the timely payment of interest on such Moody's Eligible
Asset and principal thereof to maturity, the Moody's insurance claims-paying
ability rating of the issuer of the insurance policy (provided that for purposes
of clauses (ii) and (iii) if the insurance claims-paying ability of an issuer of
a Policy or insurance policy is not rated by Moody's but is rated by S&P, such
issuer shall be deemed to have a Moody's insurance claims-paying ability rating
which is two full categories lower than the S&P insurance claims-paying ability
rating) and (b) the Moody's Exposure Period. Moody's Discount Factors for a
range of Moody's Exposure Periods are set forth below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS RATING CATEGORY
----------------------------------------------------------------
MOODY'S EXPOSURE PERIOD Aaa(1) Aa(1) A(1) Baa(1) OTHER(2) VMIG-1(3) SP-1+(3)
----------------------- ------ ----- ---- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less.............................. 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater than seven
weeks...................................... 154 164 173 205 235 137 149
9 weeks or less but greater than eight
weeks...................................... 158 169 179 209 242 138 150
</TABLE>
- ---------------
(1) Moody's rating.
(2) New Jersey Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
(3) New Jersey Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-1
or, if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not mature
or have a demand feature at par exercisable within the Moody's Exposure
Period and which do not have a long-term rating. For the purposes of the
definition of Moody's Eligible Assets, these securities will have an assumed
rating of A by Moody's.
provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-paying
ability rating in accordance with clause (a)(ii) or (a)(iii), such Moody's
Discount Factor shall be increased by an amount equal to 50% of the difference
between (a) the percentage set forth in the foregoing table under the applicable
rating category and (b) the percentage set forth in the foregoing table under
the rating category which is one category lower than the applicable rating
category.
Since the Moody's Exposure Period currently is 49 days, the Moody's
Discount Factors currently applicable to Municipal Bonds eligible for
consideration under Moody's guidelines will be determined by reference to the
factors set forth opposite the exposure period line entitled "7 weeks or less."
Notwithstanding the foregoing, (i) a 102% Moody's Discount Factor will be
applied to short-term New Jersey Municipal Bonds and short-term Municipal Bonds,
so long as such New Jersey Municipal Bonds and Municipal Bonds are rated at
least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and the Moody's Discount Factor
for such Bonds will be 125% if such Bonds are not rated by Moody's but are rated
A-1+, SP-1+ or AA by S&P and mature or have a demand feature at par exercisable
within the Moody's Exposure Period, and (ii) no Moody's Discount Factor will be
applied to cash or to Receivables for New Jersey Municipal Bonds or Municipal
Bonds Sold. "Receivables for New Jersey Municipal Bonds or Municipal Bonds
Sold," for purposes of calculating Moody's Eligible Assets as of any Valuation
Date, means no more than the aggregate of the following: (i) the book value of
receivables for New Jersey Municipal Bonds or Municipal Bonds sold as of or
prior to such Valuation Date if such receivables are due within five Business
Days of such Valuation Date, and if the trades which generated such receivables
are (A) settled through clearing house firms with respect to which the Fund has
received prior written authorization from Moody's or (B) with counterparties
having a Moody's long-term debt rating of at least Baa3; and (ii) the Moody's
Discounted Value of New Jersey Municipal Bonds or Municipal Bonds sold as of or
prior to such Valuation Date that generated receivables, if such receivables are
due within five Business
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<PAGE> 73
Days of such Valuation Date but do not comply with either of conditions (A) or
(B) of the preceding clause (i).
The Moody's guidelines impose certain requirements as to minimum issue
size, issuer diversification and geographical concentration, as well as other
requirements for purposes of determining whether New Jersey Municipal Bonds or
Municipal Bonds constitute Moody's Eligible Assets, as set forth in the table
below:
<TABLE>
<CAPTION>
MAXIMUM MAXIMUM STATE
MINIMUM MAXIMUM ISSUE TYPE MAXIMUM COUNTY OR TERRITORY
ISSUE SIZE UNDERLYING CONCENTRATION CONCENTRATION CONCENTRATION
RATING ($ MILLIONS) OBLIGOR (%)(1) (%)(1)(3) (%)(1)(4) (%)(1)(5)
------ ------------ -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Aaa.................. 10 100 100 100 100
Aa................... 10 20 60 60 60
A.................... 10 10 40 40 40
Baa.................. 10 6 20 20 20
Other(2)............. 10 4 12 12 12
</TABLE>
--------------------
(1) The referenced percentages represent maximum cumulative totals for
the related rating category and each lower rating category.
(2) New Jersey Municipal Bonds and Municipal Bonds not rated by
Moody's but rated BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to New Jersey Municipal Bonds. Territorial bonds
(other than those issued by Puerto Rico and counted collectively)
are each limited to 10% of Moody's Eligible Assets. For
diversification purposes, Puerto Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described above,
any New Jersey Municipal Bond or Municipal Bond backed by the guaranty, letter
of credit or insurance issued by a third party will be deemed to be issued by
such third party if the issuance of such third party credit is the sole
determinant of the rating on such Bond. For purposes of the issue type
concentration requirement described above, New Jersey Municipal Bonds and
Municipal Bonds will be classified within one of the following categories:
health care issues (teaching and non-teaching hospitals, public and private),
housing issues (single-and multi-family), educational facilities issues (public
and private schools), student loan issues, resource recovery issues,
transportation issues (mass transit, airport and highway bonds), industrial
revenue/pollution control bond issues, utility issues (including water, sewer
and electricity), general obligation issues, lease obligations/certificates of
participation, escrowed bonds and other issues ("Other Issues") not falling
within one of the aforementioned categories (includes special obligations to
crossover, excise and sales tax revenue, recreation revenue, special assessment
and telephone revenue bonds). In no event shall (a) more than 10% of Moody's
Eligible Assets consist of student loan issues, (b) more than 10% of Moody's
Eligible Assets consist of recovery issues or (c) more than 10% of Moody's
Eligible Assets consist of Other Issues.
Current Moody's guidelines also require that New Jersey Municipal Bonds or
Municipal Bonds constituting Moody's Eligible Assets pay interest in cash, be
publicly rated Baa or higher by Moody's or, if not rated by Moody's but rated by
S&P, that they be rated at least BBB by S&P, not have suspended ratings by
Moody's and be part of an issue of New Jersey Municipal Bonds or Municipal Bonds
of at least $10,000,000. For purposes of determining the Moody's Discount
Factors applicable to any such S&P-rated New Jersey Municipal Bonds or S&P-rated
Municipal Bonds, such New Jersey Municipal Bonds or Municipal Bonds (excluding
any short-term Municipal Bonds) will be deemed to have a Moody's rating that is
one full rating category lower than its S&P rating. When the Fund sells a New
Jersey Municipal Bond or Municipal Bond and agrees to repurchase it at a future
date, the Discounted Value of such Municipal Bond will constitute a Moody's
Eligible Asset and the amount the Fund is required to pay upon repurchase of
such bond will count as a liability for purposes of calculating the AMPS Basic
Maintenance Amount. For so long as the AMPS are rated by Moody's, the Fund will
not enter into any such reverse repurchase agreement unless it has received
written confirmation from Moody's that such transactions would not impair the
ratings assigned the AMPS by
21
<PAGE> 74
Moody's. When the Fund purchases a New Jersey Municipal Bond or Municipal Bond
and agrees to sell it at a future date to another party, cash receivable by the
Fund thereby will constitute a Moody's Eligible Asset if the long-term debt of
such other party is rated at least A2 by Moody's and such agreement has a term
of 30 days or less; otherwise the Discounted Value of such Bond will constitute
a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward Commitment
or (iv) irrevocably deposited by the Fund for the payment of dividends or
redemption.
For so long as shares of AMPS are rated by Moody's, in managing the Fund's
portfolio, the Investment Adviser will not alter the composition of the Fund's
portfolio if, in the reasonable belief of the Investment Adviser, the effect of
any such alteration would be to cause the Fund to have Moody's Eligible Assets
with an aggregate Discounted Value, as of the immediately preceding Valuation
Date, less than the AMPS Basic Maintenance Amount as of such Valuation Date;
provided, however, that in the event that, as of the immediately preceding
Valuation Date, the aggregate Discounted Value of Moody's Eligible Assets
exceeded the AMPS Basic Maintenance Amount by five percent or less, the
Investment Adviser will not alter the composition of the Fund's portfolio in a
manner reasonably expected to reduce the aggregate Discounted Value of Moody's
Eligible Assets unless the Fund shall have confirmed that, after giving effect
to such alteration, the aggregate Discounted Value of Moody's Eligible Assets
would exceed the AMPS Basic Maintenance Amount.
For so long as any shares of AMPS are rated by Moody's, the Fund will not
buy or sell financial futures contracts, write, purchase or sell call options on
financial futures contracts or purchase put options on financial futures
contracts or write call options (except covered call options) on portfolio
securities unless it receives written confirmation from Moody's that engaging in
such transactions would not impair the ratings then assigned to the shares of
AMPS by Moody's, except that the Fund may purchase or sell exchange-traded
financial futures contracts based on the Municipal Index or Treasury Bonds, and
purchase, write or sell exchange-traded put options on such financial futures
contracts, and purchase, write or sell exchange-traded call options on such
financial futures contracts (collectively "Moody's Hedging Transactions"),
subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging Transaction based
on the Municipal Index (other than Closing Transactions) that would cause
the Fund at the time of such transaction to own or have sold (A)
outstanding financial futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded financial
futures contracts based on the Municipal Index in the 30 days preceding the
time of effecting such transaction as reported by The Wall Street Journal
or (B) outstanding financial futures contracts based on the Municipal Index
having fair market value exceeding 50% of the fair market value of all
Municipal Bonds constituting Moody's Eligible Assets owned by the Fund
(other than Moody's Eligible Assets already subject to a Moody's Hedging
Transaction);
(ii) the Fund will not engage in any Moody's Hedging Transaction based
on Treasury Bonds (other than Closing Transactions) that would cause the
Fund at the time of such transaction to own or have sold (A) outstanding
financial futures contracts based on Treasury Bonds having an aggregate
Market Value exceeding 20% of the aggregate Market Value of Moody's
Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not rated
by Moody's but rated by S&P, rated AAA by S&P) or (B) outstanding financial
futures contracts based on Treasury Bonds having an aggregate fair market
value exceeding 40% of the aggregate fair market value of all Municipal
Bonds constituting Moody's Eligible Assets owned by the Fund (other than
Moody's Eligible Assets already subject to a Moody's Hedging Transaction)
and rated Baa or A by Moody's (or, if not rated by Moody's but rated by
S&P, rated A or AA by S&P) (for purposes of the foregoing clauses (i) and
(ii), the Fund shall be deemed to own the number of financial futures
contracts that underlie any outstanding options written by the Fund);
22
<PAGE> 75
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
Street Journal is less than 5,000;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract by no later than the fifth Business
Day of the month in which such contract expires and will engage in a
Closing Transaction to close out any outstanding option on a financial
futures contract by no later than the first Business Day of the month in
which such option expires;
(v) the Fund will engage in Moody's Hedging Transactions only with
respect to financial futures contracts or options thereon having the next
settlement date or the settlement date immediately thereafter;
(vi) the Fund will not engage in options and futures transactions for
leveraging or speculative purposes and will not write any call options or
sell any financial futures contracts for the purpose of hedging the
anticipated purchase of an asset prior to completion of such purchase; and
(vii) the Fund will not enter into an option or futures transaction
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets that the
Fund is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows: (i) assets subject to call options
written by the Fund that are either exchange-traded and "readily reversible" or
that expire within 49 days after the date as of which such valuation is made
shall be valued at the lesser of (A) Discounted Value and (B) the exercise price
of the call option written by the Fund; (ii) assets subject to call options
written by the Fund not meeting the requirements of clause (i) of this sentence
shall have no value; (iii) assets subject to put options written by the Fund
shall be valued at the lesser of (A) the exercise price and (B) the Discounted
Value of the subject security; (iv) futures contracts shall be valued at the
lesser of (A) settlement price and (B) the Discounted Value of the subject
security, provided that, if a contract matures within 49 days after the date as
of which such valuation is made, where the Fund is the seller the contract may
be valued at the settlement price and where the Fund is the buyer the contract
may be valued at the Discounted Value of the subject securities; and (v) where
delivery may be made to the Fund with any security of a class of securities, the
Fund shall assume that it will take delivery of the security with the lowest
Discounted Value.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the following amounts shall be subtracted from the aggregate
Discounted Value of the Moody's Eligible Assets held by the Fund: 10% of the
exercise price of a written call option; (ii) the exercise price of any written
put option; (iii) where the Fund is the seller under a financial futures
contract, 10% of the settlement price of the financial futures contract; (iv)
where the Fund is the purchaser under a financial futures contract, the
settlement price of assets purchased under such financial futures contract; (v)
the settlement price of the underlying financial futures contract if the Fund
writes put options on a financial futures contract; and (vi) 105% of the fair
market value of the underlying financial futures contracts if the Fund writes
call options on a financial futures contract and does not own the underlying
contract.
For so long as any shares of AMPS are rated by Moody's, the Fund will not
enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that constitute
Moody's Hedging Transactions), except that the Fund may enter into such
contracts to purchase newly-issued securities on the date such securities are
issued ("Forward Commitments"), subject to the following limitations:
(i) the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short term, fixed-income securities rated P-1,
MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a fair market value that equals or exceeds the amount of
the Fund's obligations under any Forward Commitments to which it is from
time to time a party or long-term, fixed
23
<PAGE> 76
income securities with a Discounted Value that equals or exceeds the amount
of the Fund's obligations under any Forward Commitment to which it is from
time to time a party, and
(ii) the Fund will not enter into a Forward Commitment unless, after
giving effect thereto, the Fund would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which the
Fund is a party and of all securities deliverable to the Fund pursuant to such
Forward Commitments shall be zero.
For so long as shares of AMPS are rated by S&P or Moody's, the Fund, unless
it has received written confirmation from S&P and/or Moody's, as the case may
be, that such action would not impair the ratings then assigned to the AMPS by
S&P and/or Moody's, as the case may be, will not (i) borrow money except for the
purpose of clearing transactions in portfolio securities (which borrowings under
any circumstances shall be limited to the lesser of $10 million and an amount
equal to 5% of the fair market value of the Fund's assets at the time of such
borrowings and which borrowings shall be repaid within 60 days and not be
extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets and S&P Eligible Assets to be less than the AMPS Basic
Maintenance Amount), (ii) engage in short sales of securities, (iii) lend any
securities, (iv) issue any class or series of stock ranking prior to or on a
parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the Fund,
(v) reissue any AMPS previously purchased or redeemed by the Fund, (vi) merge or
consolidate into or with any other corporation or entity, (vii) change the
Fund's pricing service or (viii) engage in reverse repurchase agreements.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and the portfolio
managers of the Fund, including their ages and their principal occupations
during the last five years is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
TERRY K. GLENN (58) -- President and Director(1)(2) -- Executive Vice
President of the Investment Adviser and Merrill Lynch Asset Management, L.P.
("MLAM") (which terms as used herein include their corporate predecessors) since
1983; Executive Vice President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; President of Princeton Funds Distributor,
Inc. ("PFD") since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
RONALD W. FORBES (58) -- Director(2) -- 1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany since 1989; Consultant, Urban Institute, Washington, D.C. since
1995.
CYNTHIA A. MONTGOMERY (46) -- Director(2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School since 1989; Associate Professor, J.L. Kellogg Graduate School of
Management, Northwestern University from 1985 to 1989; Assistant Professor,
Graduate School of Business Administration, The University of Michigan from 1979
to 1985; Director, UNUM Corporation since 1990 and Director of Newell Co. since
1995.
CHARLES C. REILLY (67) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990.
KEVIN A. RYAN (66) -- Director(2) -- 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and
24
<PAGE> 77
Character; Professor of Education at Boston University since 1982; Formerly
taught on the faculties of The University of Chicago, Stanford University and
Ohio State University.
RICHARD R. WEST (61) -- Director(2) -- Box 604, Genoa, Nevada 89411,
Professor of Finance since 1984, and Dean from 1984 to 1993, and currently Dean
Emeritus of New York University, Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc., Vornado Realty Trust, Inc.,
Vornado Operating Company and Alexander's Inc.
ARTHUR ZEIKEL (66) -- Director(1)(2) -- Chairman of the Investment Adviser
and MLAM from 1997 to 1999; President of the Investment Adviser and MLAM from
1977 to 1997; Chairman of Princeton Services from 1997 to 1999, Director thereof
from 1993 to 1999, and President thereof from 1993 to 1997; Executive Vice
President of ML & Co. from 1990 to 1999.
VINCENT R. GIORDANO (54) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993.
KENNETH A. JACOB (48) -- Vice President(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Manager since 1984.
ROBERT A. DIMELLA, CFA (32) -- Vice President and Portfolio
Manager(1)(2) -- Vice President of MLAM since 1997; Assistant Vice President of
MLAM from 1995 to 1997; Assistant Portfolio Manager of MLAM from 1993 to 1995.
ROBERTO W. ROFFO (33) -- Vice President and Portfolio
Manager(1)(2) -- First Vice President of MLAM since 1997; Assistant Portfolio
Manager of MLAM from 1993 to 1995; Assistant Portfolio Manager with Prudential
Investment Advisers from 1991 to 1993.
DONALD C. BURKE (38) -- Senior Vice President and Treasurer(1)(2) -- Senior
Vice President and Treasurer of the Investment Adviser and MLAM since 1999;
Senior Vice President and Treasurer of Princeton Services since 1999; Vice
President of PFD since 1999; First Vice President of MLAM since 1997; Vice
President of MLAM from 1990 to 1997; Director of Taxation of MLAM since 1990.
WILLIAM E. ZITELLI, JR. (30) -- Secretary(1)(2) -- Attorney associated with
the Investment Adviser since 1998; Attorney associated with Pepper Hamilton LLP
from 1997 to 1998; Attorney associated with Reboul, MacMurray, Hewitt, Maynard
and Kristol from 1994 to 1997.
- ---------------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee, officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
In connection with the election of the Fund's Directors, holders of shares
of AMPS and other preferred stock, voting as a separate class, are entitled to
elect two of the Fund's Directors, and the remaining Directors will be elected
by holders of common stock and preferred stock voting together as a single
class. Messrs. Reilly and West have been designated as the Directors to be
elected by holders of the preferred stock. See "Description of Capital Stock" in
the prospectus.
COMPENSATION OF DIRECTORS
Pursuant to an Investment Advisory Agreement with the Fund, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Directors who are affiliated persons of ML & Co. or its
subsidiaries.
The Fund pays each Director not affiliated with the Investment Adviser
(each a "non-affiliated Director") a fee of $ per year plus $ per
meeting attended, and pays all Director's out-of-pocket expenses relating to
attendance at meetings. The Fund also pays members of the Board's audit and
nominating committee (the "Committee"), which consists of all the non-affiliated
Directors, an annual fee of $ . The Chairman of the Committee receives an
additional annual fee of $ .
The following table sets forth compensation to be paid by the Fund to the
non-affiliated Directors projected through the end of the Fund's first full
fiscal year and for the calendar year ended December 31,
25
<PAGE> 78
1998 the aggregate compensation paid by all investment companies advised by the
Investment Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the
non-affiliated Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
RETIREMENT FAM/MLAM
AGGREGATE BENEFITS ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF DIRECTOR FROM FUND FUND EXPENSE DIRECTORS
---------------- ------------ ------------------ ------------------
<S> <C> <C> <C>
Ronald W. Forbes(1)............................. $ None $192,567
Cynthia A. Montgomery(1)........................ $ None $192,567
Charles C. Reilly(1)............................ $ None $362,858
Kevin A. Ryan(1)................................ $ None $192,567
Richard R. West(1).............................. $ None $334,125
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (37 registered investment companies consisting of 50 portfolios); Ms.
Montgomery (37 registered investment companies consisting of 50 portfolios);
Mr. Reilly (56 registered investment companies consisting of 69 portfolios);
Mr. Ryan (37 registered investment companies consisting of 48 portfolios);
and Mr. West (58 registered investment companies consisting of 83
portfolios).
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Fund has entered into an Investment Advisory Agreement with the
Investment Adviser. The Fund pays the Investment Adviser a monthly fee at an
annual rate of 0.55 of 1% of the Fund's average weekly net assets (i.e., the
average weekly value of the total assets of the Fund, including proceeds from
the issuance of shares of preferred stock, minus the sum of accrued liabilities
of the Fund and accumulated dividends on the shares of preferred stock).
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing proxies, listing fees,
if any, stock certificates and shareholder reports, charges of the custodian and
the transfer and dividend disbursing agent and registrar, fees and expenses with
respect to the issuance of preferred stock, Securities and Exchange Commission
fees, fees and expenses of non-interested Directors, accounting and pricing
costs, insurance, interest, brokerage costs, litigation and other extraordinary
or non-recurring expenses, mailing and other expenses properly payable by the
Fund. Accounting services are provided to the Fund by the Investment Adviser,
and the Fund reimburses the Investment Adviser for its costs in connection with
such services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940 Act)
of any such party. Such contract is not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for an advisory
client when other clients are selling the same security. If purchases or sales
of securities by the Investment Adviser for the Fund or other funds for which it
acts as investment adviser or for other advisory clients arise for consideration
at or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. Transactions effected by the Investment Adviser (or its
26
<PAGE> 79
affiliates) on behalf of more than one of its clients during the same period may
increase the demand for securities being purchased or the supply of securities
being sold, causing an adverse effect on price.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S. Government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading
securities. In addition, no employee may purchase or sell any security that at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" that prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to providing the best
price and execution, securities firms that provide investment research to the
Investment Adviser, including Merrill Lynch, may receive orders for transactions
by the Fund. Research information provided to the Investment Adviser by
securities firms is supplemental. It does not replace or reduce the level of
service performed by the Investment Adviser and the expenses of the Investment
Adviser will not necessarily be reduced because it receives supplemental
research information.
The Fund invests in securities traded in the over-the-counter markets, and
the Fund intends to deal directly with dealers who make markets in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere. Under the 1940 Act, except as permitted by
exemptive order, persons affiliated with the Fund, including Merrill Lynch, are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities. Since transactions in the over-the-counter market usually involve
transactions with dealers acting as principals for their own accounts, the Fund
does not deal with Merrill Lynch and its affiliates in connection with such
transactions except that, pursuant to exemptive orders obtained by the
Investment Adviser, the Fund may engage in principal transactions with the
Underwriter in high quality, short-term, tax-exempt securities. See "Investment
Restrictions." However, affiliated persons of the Fund, including Merrill Lynch,
may serve as its brokers in certain over-the-counter transactions conducted on
an agency basis.
The Fund also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuer. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
27
<PAGE> 80
PORTFOLIO TURNOVER
The Fund may dispose of securities without regard to the time they have
been held when such action, for defensive or other reasons, appears advisable to
the Investment Adviser. While it is not possible to predict turnover rates with
any certainty, presently it is anticipated that the Fund's annual portfolio
turnover rate, under normal circumstances should be less than 100%. (The
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are excluded.)
A high portfolio turnover rate has certain tax consequences and results in
greater transaction costs, which are borne directly by the Fund.
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as it so qualifies, in any taxable
year in which it distributes at least 90% of its taxable net income and 90% of
its tax-exempt net income (see below), the Fund (but not its shareholders) will
not be subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Fund intends to distribute
substantially all of such income. Under present New Jersey law, a RIC such as
the Fund, pays a flat tax of $250 per year. The Fund might be subject to the New
Jersey corporation business (franchise) tax for any taxable year in which it
does not qualify as a RIC.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based only
on the taxable income of a RIC. The excise tax, therefore, generally will not
apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Internal Revenue Service (the "IRS"), in a revenue ruling, held that
certain auction rate preferred stock would be treated as stock for Federal
income tax purposes. The terms of the AMPS are substantially similar, but not
identical, to the auction rate preferred stock discussed in the revenue ruling,
and in the opinion of Brown & Wood LLP, counsel to the Fund, the shares of AMPS
will constitute stock of the Fund and distributions with respect to shares of
AMPS (other than distributions in redemption of shares of AMPS subject to
Section 302(b) of the Code) will constitute dividends to the extent of the
Fund's current and accumulated earnings and profits as calculated for Federal
income tax purposes. Nevertheless, it is possible that the IRS might take a
contrary position, asserting, for example, that the shares of AMPS constitute
debt of the Fund. If this position were upheld, the discussion of the treatment
of distributions below would not apply. Instead, distributions by the Fund to
holders of shares of AMPS would constitute interest, whether or not they
exceeded the earnings and profits of the Fund, would be included in full in the
income of the recipient and would be taxed as ordinary income. Counsel believes
that such a position, if asserted by the IRS, would be unlikely to prevail.
The Fund intends to qualify to pay "exempt-interest dividends" as defined
in Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the Fund as exempt-interest
dividends in a written notice mailed to the Fund's shareholders within 60 days
after the close of its taxable year. To the extent that the dividends
distributed to the Fund's shareholders are derived from interest income exempt
from tax under Code Section 103(a) and are properly designated as
28
<PAGE> 81
exempt-interest dividends, they will be excludable from a shareholder's gross
income for Federal tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's social security and
railroad retirement benefits subject to Federal income taxes. Each shareholder
is advised to consult a tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Code Section 103(a) if such shareholder
would be treated as a "substantial user" or "related person" under Code Section
147(a) with respect to property financed with the proceeds of an issue of
"industrial development bonds" or "private activity bonds," if any, held by the
Fund.
The portion of the Fund's exempt-interest dividends properly identified in
a year-end statement as directly attributable to interest on New Jersey
Municipal Bonds and the portion of distributions attributable to gains from New
Jersey Municipal Bonds ("New Jersey exempt-interest dividends") also will be
exempt from New Jersey personal income taxes. In order to pass through
tax-exempt interest for New Jersey personal income tax purposes, the Fund, among
other requirements, must have not less than 80% of the aggregate principal
amount of its investments invested in New Jersey Municipal Bonds at the close of
each quarter of the tax year (the "80% Test"). For purposes of calculating
whether the 80% Test is satisfied, financial options, futures, forward contracts
and similar financial instruments relating to interest-bearing obligations are
excluded from the principal amount of the Fund's investments. The Fund intends
to comply with this requirement so as to enable it to pass through interest
exempt from both Federal income tax and New Jersey personal income tax. In the
event the Fund does not so comply, distributions by the Fund may be taxable to
shareholders for New Jersey personal income tax purposes. However, regardless of
whether the Fund meets the 80% Test, all distributions attributable to interest
earned on Federal obligations will be exempt from New Jersey personal income
tax. Shareholders subject to income taxation by states other than New Jersey
will realize a lower after-tax rate of return than New Jersey shareholders since
the dividends distributed by the Fund generally will not be exempt, to any
significant degree, from income taxation by such other states. The Fund will
inform shareholders annually as to the portion of the Fund's distributions that
constitutes exempt-interest dividends and the portion that is exempt from New
Jersey personal income taxes. To the extent attributable to exempt-interest
dividends, interest on indebtedness incurred or continued to purchase or carry
Fund shares is not deductible for Federal income tax purposes and is not
deductible for New Jersey personal income tax purposes.
Exempt-interest dividends and gains paid to a corporate shareholder will be
subject to New Jersey corporation business (franchise) tax and, if applicable,
the New Jersey corporation income tax. Accordingly, investors in the Fund,
including, in particular, corporate investors which may be subject to the New
Jersey corporation business (franchise) tax and, if applicable, the New Jersey
corporation income tax, should consult their tax advisors with respect to the
application of such taxes to an investment in the Fund, to the receipt of the
Fund dividends and as to their New Jersey tax situation in general.
On February 21, 1997, the Tax Court of New Jersey ruled against the
Director of the Division of Taxation holding against the New Jersey requirement
that fund investors pay state taxes on interest their funds earned from U.S.
government securities if the 80% Test was not met. As a result of the court
decision, the State of New Jersey could be forced to pay substantial amounts in
tax refunds to state residents who are mutual fund investors. At this time, the
effect of this litigation cannot be evaluated.
To the extent that the Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ("ordinary income dividends"), such distributions
are considered ordinary income for Federal income tax purposes. Distributions,
if any, from an excess of net long-term capital gains over net short-term
capital losses derived from the sale of securities or from certain transactions
in futures or options ("capital gain dividends") are taxable as long-term
capital gains for Federal income tax purposes, regardless of the length of time
the shareholder has owned Fund shares and, for New Jersey income tax purposes,
are treated as capital gains which are taxed at ordinary income tax rates.
Certain categories of capital gains are taxable at different rates. Generally
not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
exempt-interest dividends and capital gain dividends, as well as any amount of
capital gain dividends in the different categories of capital gain referred to
above. Distributions by the Fund, whether from exempt-interest
29
<PAGE> 82
income, ordinary income or capital gains, are not eligible for the dividends
received deduction allowed to corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated for
Federal income tax purposes as ordinary income rather than capital gain. This
rule may increase the amount of ordinary income dividends received by
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Any loss upon the sale
or exchange of Fund shares held for six months or less will be disallowed to the
extent of any exempt-interest dividends received by the shareholder. In
addition, any such loss that is not disallowed under the rule stated above will
be treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
The IRS has taken the position in a revenue ruling that if a RIC has two or
more classes of shares, it may designate distributions made to each class in any
year as consisting of no more than such class's proportionate share of
particular types of income, including exempt interest and net long-term capital
gains. A class's proportionate share of a particular type of income is
determined according to the percentage of total dividends paid by the RIC during
such year that was paid to such class. Thus, the Fund is required to allocate a
portion of its net capital gains and other taxable income to the shares of AMPS
of each series. The Fund generally will notify the Auction Agent of the amount
of any net capital gains and other taxable income to be included in any dividend
on shares of AMPS prior to the Auction establishing the Applicable Rate for such
dividend. Except for the portion of any dividend that it informs the Auction
Agent will be treated as capital gains or other taxable income, the Fund
anticipates that the dividends paid on the shares of AMPS will constitute
exempt-interest dividends. The amount of net capital gains and ordinary income
allocable to shares of AMPS (the "taxable distribution") will depend upon the
amount of such gains and income realized by the Fund and the total dividends
paid by the Fund on shares of Common Stock and shares of AMPS during a taxable
year, but the taxable distribution generally is not expected to be significant.
In the opinion of Brown & Wood LLP, counsel to the Fund, under current law
the manner in which the Fund intends to allocate items of tax-exempt income, net
capital gains and other taxable income, if any, among shares of Common Stock and
shares of AMPS will be respected for Federal income tax purposes. However, the
tax treatment of Additional Dividends may affect the Fund's calculation of each
class' allocable share of capital gains and other taxable income. See "Tax
Treatment of Additional Dividends." In addition, there is currently no direct
guidance from the IRS or other sources specifically addressing whether the
Fund's method for allocating tax-exempt income, net capital gains and other
taxable income among shares of common stock and shares of AMPS will be respected
for Federal income tax purposes, and it is possible that the IRS could disagree
with counsel's opinion and attempt to reallocate the Fund's net capital gains or
other taxable income. In the event of a reallocation, some of the dividends
identified by the Fund as exempt-interest dividends to holders of shares of AMPS
may be recharacterized as additional capital gains or other taxable income. In
the event of such recharacterization, the Fund would not be required to make
payments to such shareholders to offset the tax effect of such reallocation. In
addition, a reallocation may cause the Fund to be liable for income tax and
excise tax on any reallocated taxable income. Brown & Wood LLP has advised the
Fund that, in its opinion, if the IRS were to challenge in court the Fund's
allocations of income and gain, the IRS would be unlikely to prevail. A holder
should be aware, however, that the opinion of Brown & Wood llp represents only
its best legal judgment and is not binding on the IRS or the courts.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The Federal alternative minimum
tax applies to interest received on "private activity bonds" issued after August
7, 1986. Private activity bonds are bonds which, although tax-exempt, are used
for purposes other than those generally performed by governmental units and
which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified as
an item of "tax preference," which could subject certain investors in such
bonds, including
30
<PAGE> 83
shareholders of the Fund, to an increased Federal alternative minimum tax. The
Fund intends to purchase such "private activity bonds" and will report to
shareholders within 60 days after calendar year-end the portion of its dividends
declared during the year which constitutes an item of tax preference for Federal
alternative minimum tax purposes. The Code further provides that corporations
are subject to a Federal alternative minimum tax based, in part, on certain
differences between taxable income as adjusted for other tax preferences and the
corporation's "adjusted current earnings", which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by the
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay a Federal alternative minimum tax on exempt-interest
dividends paid by the Fund.
The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special tax
rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such nontraditional
instruments could be recharacterized as taxable ordinary income.
If at any time when shares of AMPS are outstanding the Fund does not meet
the asset coverage requirements of the 1940 Act, the Fund will be required to
suspend distributions to holders of Common Stock until the asset coverage is
restored. See "Description of AMPS -- Dividends -- Restrictions on Dividends and
Other Payments." This may prevent the Fund from distributing at least 90% of its
net income, and may, therefore, jeopardize the Fund's qualification for taxation
as a RIC. If the Fund were to fail to qualify as a RIC, some or all of the
distributions paid by the Fund would be fully taxable for Federal and New Jersey
income tax purposes. Upon any failure to meet the asset coverage requirements of
the 1940 Act, the Fund, in its sole discretion, may, and under certain
circumstances will be required to, redeem shares of AMPS in order to maintain or
restore the requisite asset coverage and avoid the adverse consequences to the
Fund and its shareholders of failing to qualify as a RIC. See "Description of
AMPS -- Redemption." There can be no assurance, however, that any such action
would achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted for
this purpose if it qualifies for the dividends paid deduction under the Code.
Some types of preferred stock that the Fund currently contemplates issuing may
raise an issue as to whether distributions on such preferred stock are
"preferential" under the Code and therefore not eligible for the dividends paid
deduction. The Fund intends to issue preferred stock that counsel advises will
not result in the payment of a preferential dividend and may seek a private
letter ruling from the IRS to that effect. If the Fund ultimately relies solely
on a legal opinion when it issues such preferred stock, there is no assurance
that the IRS would agree that dividends on the preferred stock are not
preferential. If the IRS successfully disallowed the dividends paid deduction
for dividends on the preferred stock, the Fund could lose the benefit of the
special treatment afforded RICs under the Code. In this case, dividends paid by
the Fund would not be exempt from Federal income taxes. Additionally, the Fund
would be subject to the alternative minimum tax.
Under certain Code provisions, some taxpayers may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
31
<PAGE> 84
TAX TREATMENT OF ADDITIONAL DIVIDENDS
If the Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of shares of AMPS who are subject to the Retroactive
Taxable Allocation. See "Description of AMPS -- Dividends -- Additional
Dividends" in the prospectus. The Federal income tax consequences of Additional
Dividends under existing law are uncertain. The Fund intends to treat a holder
as receiving a dividend distribution in the amount of any Additional Dividend
only as and when such Additional Dividend is paid. An Additional Dividend
generally will be designated by the Fund as an exempt-interest divided except as
otherwise required by applicable law. However, the IRS may assert that all or
part of an Additional Dividend is a taxable dividend either in the taxable year
for which the Retroactive Taxable Allocation is made or in the taxable year in
which the Additional Dividend is paid.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to the
Fund or an exception applies, such options and financial futures contracts that
are "Section 1256 contracts" will be "marked to market" for Federal income tax
purposes at the end of each taxable year, i.e., each such option or financial
futures contract will be treated as sold for its fair market value on the last
day of the taxable year, and any gain or loss attributable to Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by the Fund may alter
the timing and character of distributions to shareholders. The mark-to-market
rules outlined above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or interest rates
with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, the Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and New Jersey personal income
tax, corporation business (franchise) tax and the corporation income tax laws
presently in effect. For the complete provisions, reference should be made to
the pertinent Code sections, the Treasury Regulations promulgated thereunder and
New Jersey personal income and corporation business (franchise) and the
corporation income tax laws. The Code and the Treasury Regulations, as well as
the New Jersey income tax laws, are subject to change by legislative, judicial
or administrative action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes.
NET ASSET VALUE
Net asset value per share of common stock is determined as of 15 minutes
after the close of business on the New York Stock Exchange (the "NYSE")
(generally, the NYSE closes at 4:00 p.m. Eastern time) on the last Business Day
of each week. For purposes of determining the net asset value of a share of
common stock, the value of the securities held by the Fund plus any cash or
other assets (including interest accrued but not yet received) minus all
liabilities (including accrued expenses) and the aggregate liquidation value of
the outstanding shares of AMPS is divided by the total number of shares of
common stock outstanding at such time. Expenses, including the fees payable to
the Investment Adviser, are accrued daily.
The New Jersey Municipal Bonds and Municipal Bonds in which the Fund
invests are traded primarily in the over-the-counter markets. In determining net
asset value, the Fund utilizes the valuations of portfolio securities furnished
by a pricing service approved by the Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. New
32
<PAGE> 85
Jersey Municipal Bonds and Municipal Bonds for which quotations are not readily
available are valued at fair market value on a consistent basis as determined by
the pricing service using a matrix system to determine valuations. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Board of Directors.
The Board of Directors has determined in good faith that the use of a pricing
service is a fair method of determining the valuation of portfolio securities.
Positions in futures contracts are valued at closing prices for such contracts
established by the exchange on which they are traded, or if market quotations
are not readily available, are valued at fair value on a consistent basis using
methods determined in good faith by the Board of Directors.
The Fund determines and makes available for publication the net asset value
of its common stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities are
published in Barron's, the Monday edition of The Wall Street Journal, and the
Monday and Saturday editions of The New York Times.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required to
file reports, proxy statements and other information with the Commission. Any
such reports, proxy statements and other information can be inspected and copied
at the public reference facilities of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: Regional Office, at Seven World Trade
Center, Suite 1300, New York, New York 10048; Pacific Regional Office, at 5670
Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and Midwest
Regional Office, at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
at http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Fund, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Fund can also be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
Additional information regarding the Fund and the shares of AMPS is
contained in the Registration Statement on Form N-2, including amendments,
exhibits and schedules thereto, relating to such shares filed by the Fund with
the Commission in Washington, D.C. This statement of additional information and
the prospectus do not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares offered
hereby, reference is made to the Registration Statement. Statements contained in
this statement of additional information and the prospectus as to the contents
of any contract or other document referred to are not necessarily complete and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
33
<PAGE> 86
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
MuniHoldings New Jersey Insured Fund IV, Inc.:
We have audited the accompanying statement of assets, liabilities and capital of
MuniHoldings New Jersey Insured Fund IV, Inc. as of , 1999. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of MuniHoldings New
Jersey Insured Fund IV, Inc. as of , 1999 in conformity with
generally accepted accounting principles.
34
<PAGE> 87
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
, 1999
<TABLE>
<S> <C>
ASSETS
Cash................................................... $100,005
Offering costs (Note 1)................................
--------
Total assets......................................
--------
LIABILITIES
Liabilities and accrued expenses (Note 1)..............
--------
NET ASSETS.................................................. $100,005
========
CAPITAL
Common Stock, par value $.10 per share; 200,000,000
shares authorized: 6,667 shares issued and outstanding
(Note 1).............................................. $ 667
Paid-in Capital in excess of par....................... 99,338
--------
Total Capital-Equivalent to $15.00 net asset value per
share of Common Stock (Note 1)........................ $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on April
5, 1999 as a closed-end, non-diversified management investment company and has
had no operations other than the sale to Fund Asset Management, L.P. (the
"Investment Adviser") of an aggregate of 6,667 shares of Common Stock for
$100,005 on , 1999. The General Partner of the Investment Adviser is
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
The Investment Adviser, on behalf of the Fund, will incur organization
costs estimated at $ . Direct costs relating to the public offering of the
Fund's shares will be charged to capital at the time of issuance of shares.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at an annual rate equal to 0.55 of 1% of the
average weekly net assets of the Fund, including proceeds from the issuance of
Preferred Stock. The Investment Adviser will pay Merrill Lynch, Pierce, Fenner &
Smith Incorporated a commission in the amount of % of the price to the
public in connection with the initial public offering of the Fund's common
stock.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code of
1986, as amended) will not be subject to Federal income tax on taxable income
(including realized capital gains) that is distributed to shareholders.
35
<PAGE> 88
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
, 1999
(IN THOUSANDS)
[TO BE PROVIDED BY AMENDMENT]
See Notes to Financial Statements.
36
<PAGE> 89
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
AS OF , 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $ )
(Note 1a)................................................... $
Cash........................................................
Receivables:
Capital shares sold....................................... $
Interest..................................................
Investment adviser (Note 2)...............................
--------
Other assets................................................
--------
Total assets................................................
--------
LIABILITIES:
Payable for securities purchased............................
Accrued expenses and other liabilities......................
--------
Total liabilities...........................................
========
NET ASSETS:
Net assets.................................................. $
========
CAPITAL:
Capital stock (200,000,000 shares authorized) (Note 4):
Common stock, par value $.10 per share ( shares
issued and outstanding)................................ $
Paid-in capital in excess of par............................
Undistributed investment income -- net......................
Unrealized appreciation on investment -- net................
--------
Total capital -- Equivalent to $ net asset value
per share of Common Stock................................. $
========
</TABLE>
See Notes to Financial Statements.
37
<PAGE> 90
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
MuniHoldings New Jersey Insured Fund IV, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund's financial statements are prepared in
accordance with generally accepted accounting principles which may require the
use of management accruals and estimates. Prior to commencement of operations on
, 1999, the Fund had no operations other than those relating to
organizational matters and the sale of 6,667 shares of Common Stock on
, 1999 to Fund Asset Management, L.P. ("FAM") for $100,005. The Fund
determines and makes available for publication the net asset value of its Common
Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock
Exchange under the symbol MHU. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt markets. Losses may arise due to changes
in the value of the contract or if the counterparty does not perform under the
contract.
- Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts for the purpose
of hedging the market risk on existing securities or the intended
purchase of securities. Futures contracts are contracts for delayed
delivery of securities at a specific future date and at a specific price
or yield. Upon entering into a contract, the Fund deposits and maintains
as collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
- Options -- The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently marked
to market to reflect the current market value of the option written. When
a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the
basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the
option to the extent of the premiums received or paid (or gain or loss to
the extent the cost of the closing transaction exceeds the premium paid
or received).
Written and purchased options are non-income producing investments.
38
<PAGE> 91
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(c) Income taxes -- It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.55% of the Fund's average weekly net assets.
For the period ended , 1999, FAM earned fees of $ , all of which
was voluntarily waived. FAM also reimbursed the Fund additional expenses of
$ .
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors
of FAM, PSI, and/or ML & Co.
3. INVESTMENTS:
Purchases of investments, excluding short-term securities, for the period
ended , 1999 were $ . There were no long term sales.
Net unrealized gains as of , 1999 were as follows:
<TABLE>
<CAPTION>
UNREALIZED
GAINS
----------
<S> <C>
Long-term investments....................................... $
-------
Total............................................. $
=======
</TABLE>
As of , 1999, net unrealized appreciation for Federal income tax
purposes aggregated $ , of which $ related to appreciated
securities and $ related to depreciated securities. The aggregate cost of
investments at , 1999 for Federal income tax purposes was
$ .
4. CAPITAL STOCK TRANSACTIONS:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of holders of
Common Stock.
COMMON STOCK
Shares issued and outstanding increased by during the period
ended , 1999.
39
<PAGE> 92
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONCLUDED)
5. GENERAL:
As of , 1999, the Fund had only four days of investment
operations and had not yet declared dividends (whereas it will ordinarily do so
on a monthly basis). As a result, the Fund believes that more extensive interim
financial statements would not be indicative of the Fund's current and ongoing
operations. The Fund believes that such financial statements may be misleading
to potential investors and, accordingly, believes that inclusion of such
financial statements would be inappropriate. For the period ended ,
1999, the Fund had net investment income of $ . FAM voluntarily waived all
expenses.
40
<PAGE> 93
APPENDIX A
ECONOMIC AND OTHER CONDITIONS IN NEW JERSEY
The following information is a brief summary of factors affecting the
economy of the State of New Jersey and does not purport to be a complete
description of such factors. Other factors will effect issuers. The summary is
based primarily upon one or more of the most recent publicly available offering
statements relating to debt offerings of New Jersey issuers, however, it has not
been updated. The Fund has not independently verified the information.
New Jersey (sometimes referred to herein as the "State") personal income
tax rates were reduced so that beginning with the tax year 1996, personal income
tax rates are, depending upon a taxpayer's level of income and filing status,
30%, 15% or 9% lower than 1993 tax rates.
The State operates on a fiscal year beginning July 1 and ending June 30.
For example, "Fiscal Year 2000" refers to the State's fiscal year beginning July
1, 1999 and ending June 30, 2000.
The General Fund is the fund into which all State revenues, not otherwise
restricted by statute, are deposited and from which appropriations are made. The
largest part of the total financial operations of the State is accounted for in
the General Fund. Revenues received from taxes and unrestricted by statute, most
federal revenues, and certain miscellaneous revenue items are recorded in the
General Fund.
The State's undesignated General Fund balance was $442 million for Fiscal
Year 1996, $281 million for Fiscal Year 1997 and $228 million for Fiscal Year
1998. For the Fiscal Year 1999 and the Fiscal Year 2000, the balance in the
undesignated General Fund is estimated to be $311 million and $113 million,
respectively.
The State finances certain capital projects primarily through the sale of
the general obligation bonds of the State. These bonds are backed by the full
faith and credit of the state. Certain state tax revenues and certain other fees
are pledged to meet the principal payments, interest payments and redemption
premium payments, if any, required to fully pay the bonds. No general obligation
debt can be issued by the State without prior voter approval, except that no
voter approval is required for any law authorizing the creation of a debt for
the purpose of refinancing all or a portion of outstanding debt of the State, so
long as such law requires that the refinancing provide a debt service savings.
The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture.
In its seventh year of expansion, the State has benefited and will continue
to benefit from national growth. While the latest national indicators show that
economic growth strongly accelerated during the first quarter of 1998, the
inflation rate remained low. After very robust economic growth of 5.5% in the
first quarter of 1998, inflation-adjusted gross domestic product slowed to 1.4%
in the second quarter. This second quarter pace was slower, but was positive and
more sustainable.
Business investment expenditures and consumer spending have increased
substantially in the nation as well as in the State. Capital and consumer
spending may continue to rise due to the sustained character of economic growth
and the interest-sensitive homebuilding industry may continue to provide
stimulus both nationally and in New Jersey. It is expected that the employment
and income growth that has and is taking place will lead to further growth in
consumer outlays. Reasons for continued optimism in New Jersey include
increasing employment levels and a higher-than-national level of per capita
personal income. Also, several expansions of existing hotel-casinos and plans
for several new casinos in Atlantic City will mean additional job creation.
In addition, the State's growth potential is not yet as limited by labor
supply constraints affecting some other parts of the country. The region's
manufacturers and trade-related service sectors could also get a lift from
continued recovery in Western Europe and Mexico and from relatively high
economic growth in South America. At the same time, the State appears to be less
dependent on exports to East Asian countries that currently have financial
difficulties than many other states, especially on the West Coast.
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The State of New Jersey has implemented a plan to address the Year 2000
data processing problem and ensure the continuation of government operations
into the Year 2000 and beyond. Planning for the Year 2000 commenced in 1997 with
the requirement that the various State departments submit comprehensive three
year action plans identifying all year 2000 impacts, strategies and timeframes
for addressing these impacts and estimates of cost. The State imposed a
moratorium during Fiscal Year 1998 on all non-year 2000 related data processing
activities to ensure availability of resources for Year 2000 compliance.
Agencies were directed to review current and ongoing technology initiatives in
light of the moratorium and suspend all those that are not considered mission
critical. This moratorium will remain in effect until each agency can certify
that it is Year 2000 compliant. As of December 31, 1998, the testing, validation
and implementation of 75 percent of all centrally maintained state systems was
complete. Departmental systems are in varying stages of remediation. The total
estimated cost to the State to achieve Year 2000 compliance is $120 million of
which approximately $66 million of expenditures have been incurred as of
December 31, 1998. Colleges and universities, authorities, municipal, county and
local sub-divisions will address Year 2000 issues separately.
Looking further ahead, prospects for New Jersey are favorable. While growth
is likely to be slower than in the nation, the locational advantages that have
served New Jersey well for many years will still be there. Structural changes
that have been going on for years can be expected to continue, with job creation
concentrated most heavily in the service industries.
Tort, Contract and Other Claims. At any given time, there are various
numbers of claims and cases pending against the State, State agencies and
employees, seeking recovery of monetary damages that are primarily paid out of
the fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1,
et. seq.). The State does not formally estimate its reserve representing
potential exposure for these claims and cases. The State is unable to estimate
its exposure for these claims and cases.
The State routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six-month
investigation prior to the filing of any suit against it.
In addition, at any given time, there are various numbers of contract and
other claims against the State and State agencies, including environmental
claims asserted against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.
At any given time, there are various numbers of claims and cases pending
against the University of Medicine and Dentistry and its employees, seeking
recovery of monetary damages that are primarily paid out of the Self Insurance
Reserve Fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A.
59:1-1, et seq.). An independent study estimated an aggregate potential exposure
of $85,300,000 for tort and medical malpractice claims pending as of December
31, 1997. In addition, at any given time, there are various numbers of contract
and other claims against the University of Medicine and Dentistry, seeking
recovery of monetary damages or other relief which, if granted, would require
the expenditure of funds. The State is unable to estimate its exposure for these
claims.
Buena Regional Commercial Township et al. v. New Jersey Department of
Education et al. This lawsuit was filed in Superior Court, Chancery Division,
Cumberland County. This lawsuit was filed December 9, 1997, on behalf of 17
rural school districts seeking the same type of relief as has been mandated to
be provided to the poor urban school districts in Abbott v. Burke. The
plaintiffs requested a declaratory judgement stating that the chancery court
retain jurisdiction, pending the remanding of the matter to the Commissioner of
Education for a hearing. The petition was then amended to include three more
rural districts for a total of 20. The State and plaintiffs entered into a
consent order to transfer the matter to the Commissioner of Education for
resolution. The chancery court did not retain jurisdiction. Once the matter was
transferred to the Commissioner, plaintiffs moved to amend their pleadings and
have done so three times. With each new pleading, the State has answered with a
motion to dismiss. Decisions on the first two motions to dismiss were rendered
moot by plaintiffs' filing of a subsequent amended pleading. There has been no
decision on the last
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motion to dismiss filed. The State is unable at this time to estimate its
exposure for this claim and intends to defend this suit vigorously.
Verner Stubaus, et al. v. State of New Jersey, et al. Plaintiffs, 25
middle income school districts, have filed a complaint alleging that the State's
system of funding for their schools is violative of the constitutional rights of
equal protection and a thorough and efficient education. The complaint was filed
April 20, 1998. On June 23, 1998, plaintiffs filed an amended complaint removing
one and adding eighteen school district plaintiffs. The State defendants filed a
motion to dismiss the amended complaint on September 18, 1998. The motion was
argued and the court reserved its decision until March 12, 1999, pending the
submission of additional briefs by the parties. The time to answer the complaint
has not yet run and a response to the amended complaint has not yet been filed.
The State will vigorously defend this matter. The State is unable, at this time,
to estimate its exposure for these claims.
United Hospitals et. al. v. State of New Jersey and William Waldman. This
case represents a challenge by 19 New Jersey hospitals to Medicaid hospital
reimbursement since 1995. The matters were filed in the Appellate Division of
the Superior Court of New Jersey. The hospitals challenge all of the following:
(i) whether the State complied with certain federal requirements for Medicaid
reimbursement; (ii) whether the State's reimbursement regulations, N.J.A.C
10:52-1 et. seq., are arbitrary, capricious and unreasonable; (iii) whether the
Department of Human Services (DHS) incorrectly calculated the rates; (iv)
whether DHS denied hospitals of a meaningful appeal process; (v) whether the
1996-7 State Appropriations Act (L.1996, c.42) violates the New Jersey
Constitution with respect to the provision for Medicaid reimbursement to
hospitals; and (vi) whether DHS violated the Medicaid State Plan, filed with the
U.S. Department of Health and Human Services, in implementing hospital rates
since 1995. The State intends to vigorously defend these actions.
Currently, the State's general obligation bonds are rated AA+ by Standard &
Poor's, Aa1 by Moody's and AA+ by Fitch IBCA. From time to time agencies may
change their ratings.
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APPENDIX B
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present, but certain protective elements may be lacking
or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Note: These bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, Al, Baal, Bal and B1.
Short-term Notes: The three ratings of Moody's for short-term notes are
MIG 1/VMIG1, MIG 2/VMIG2, and MIG 3/VMIG3; MIG 1/VMIG1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG 2/VMIG2 denotes
"high quality" with "ample margins of protection"; MIG 3/VMIG3 instruments are
of "favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades."
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DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-l repayment capacity
will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and with established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
("STANDARD & POOR'S"), MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations or a specific program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default -- capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity of the obligor to meet its financial commitment
on the obligation is extremely strong.
AA Debt rated "AA" differs from the highest-rated issues only in
small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
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A Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still
strong.
BBB Debt rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the
least CCC degree of speculation and "C" the highest degree of
speculation. While CC such debt will likely have some quality and
protective characteristics, C these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
D Debt rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during
such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of similar action
if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-l" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus
sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired
unless Standard & Poor's believes that such payments will be made
during such grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to such notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule -- the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
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-- Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service
is given a plus "+" designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH IBCA, INC.'S ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated "AAA." Because bonds rated in the "AAA" and "AA" categories
are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated
"F-1+."
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB Bonds considered to be investment grade and of
satisfactory-credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
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Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within three to 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over thentermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying
its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
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DDD Bonds are in default on interest and/or principal payments. Such
DD bonds are extremely speculative and should be valued on the
basis D of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter
of credit issued by a commercial bank.
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APPENDIX C
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance
policies (the "Policies") that the Fund may obtain from several insurance
companies with respect to insured New Jersey Municipal Bonds and Municipal Bonds
held by the Fund. The Fund has no obligation to obtain any such Policies, and
the terms of any Policies actually obtained may vary significantly from the
terms discussed below.
In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards such
companies normally use in establishing the insurability of new issues of New
Jersey Municipal Bonds and Municipal Bonds and are not necessarily the criteria
that would be used in regard to the purchase of such bonds by the Fund. The
Policies do not insure (i) municipal securities ineligible for insurance and
(ii) municipal securities no longer owned by the Fund.
The Policies do not guarantee the market value of the insured New Jersey
Municipal Bonds and Municipal Bonds or the value of the shares of the Fund. In
addition, if the provider of an original issuance insurance policy is unable to
meet its obligations under such policy or if the rating assigned to the
insurance claims-paying ability of any such insurer deteriorates, the insurance
company will not have any obligation to insure any issue held by the Fund that
is aversely affected by either of the above described events. In addition to the
payment of premium, the policies may require that the Fund notify the insurance
company as to all New Jersey Municipal Bonds and Municipal Bonds in the Fund's
portfolio and permit the insurance company to audit their records. The insurance
premiums will be payable monthly by the Fund in accordance with a premium
schedule to be furnished by the insurance company at the time the Policies are
issued. Premiums are based upon the amounts covered and the composition of the
portfolio.
The Fund will seek to utilize insurance companies that have insurance
claims-paying ability ratings of AAA from Standard & Poor's ("S&P") or Fitch
IBCA, Inc. ("Fitch") or Aaa from Moody's Investors Service ("Moody's"). There
can be no assurance however, that insurance from insurance carriers meeting
these criteria will be at all times available.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. A Fitch
insurance claims-paying ability rating provides an assessment of an insurance
company's financial strength and, therefore, its ability to pay policy and
contract claims under the terms indicated. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by Fitch.
The ability to pay claims is adjudged by Fitch to be extremely strong for
insurance companies with this highest rating. In the opinion of Fitch,
foreseeable business and economic risk factors should not have any material
adverse impact on the ability of these insurers to pay claims. In Fitch's
opinion, profitability, overall balance sheet strength, capitalization and
liquidity are all at very secure levels and are unlikely to be affected by
potential adverse underwriting, investment or cyclical events. A Moody's
insurance claims-paying ability rating is an opinion of the ability of an
insurance company to repay punctually senior policyholder obligations and
claims. An insurer with an insurance claims-paying ability rating of Aaa is
considered by Moody's to be of the best quality. In the opinion of Moody's, the
policy obligations of an insurance company with an insurance claims-paying
ability rating of Aaa carry the smallest degree of credit risk and, while the
financial strength of these companies is likely to change, such changes as can
be visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
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The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is a
separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
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APPENDIX D
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix C constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this Prospectus or Appendix D hereto, as the case
may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of the
Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid or
a Sell Order on behalf of a Beneficial Owner, the number of shares, if any, of
AMPS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid on
behalf of a Potential Beneficial Owner, the number of shares, if any, of AMPS to
be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of shares of AMPS to be sold by all Beneficial
Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell Order
exceeds the aggregate number of shares of AMPS to be purchased by all Potential
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid, the name
or names of one or more Buyer's Broker-Dealers (and the name of the Agent
Member, if any, of each such Buyer's Broker-Dealer) acting for one or more
purchasers of such excess number of shares of AMPS and the number of such shares
to be purchased from one or more Beneficial Owners on whose behalf such Broker-
Dealer acted by one or more Potential Beneficial Owners on whose behalf each of
such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of shares of AMPS to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid
exceeds the aggregate number of shares of AMPS to be sold by all Beneficial
Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell Order, the
name or names of one or more Seller's Broker-Dealers (and the name of the Agent
Member, if any, of each such Seller's Broker-Dealer) acting for one or more
sellers of such excess number of shares of AMPS and the number of such shares to
be sold to one or more Potential Beneficial Owners on whose behalf such Broker-
Dealer acted by one or more Beneficial Owners on whose behalf each of such
Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to the
AMPS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, to instruct such
Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or its
Agent Member) through the Securities Depository the amount necessary to purchase
the number of shares of AMPS to be purchased pursuant to such Bid against
receipt of such shares and advise such Potential Beneficial Owner of the
Applicable Rate for the next succeeding Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted a
Sell Order that was accepted, in whole or in part, or a Bid that was accepted,
in whole or in part, to instruct such Beneficial Owner's Agent Member to deliver
to such Broker-Dealer (or its Agent Member) through the Securities Depository
the number of shares of AMPS to be sold pursuant to such Order against payment
therefor and advise any such Beneficial Owner that will continue to hold shares
of AMPS of the Applicable Rate for the next succeeding Dividend Period;
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(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding Dividend
Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of the
Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a Potential
Beneficial Owner or a Beneficial Owner shall, in such manner and at such time or
times as in its sole discretion it may determine, allocate any funds received by
it pursuant to (b)(i) above and any shares of AMPS received by it pursuant to
(b)(ii) above among the Potential Beneficial Owners, if any, on whose behalf
such Broker-Dealer submitted Bids, the Beneficial Owners, if any, on whose
behalf such Broker-Dealer submitted Bids that were accepted or Sell Orders, and
any Broker-Dealer or Broker-Dealers identified to it by the Auction Agent
pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall instruct its
Agent Member as provided in (b)(i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to the Agent Member of the Beneficial Owner delivering
shares to such Broker-Dealer pursuant to (b)(ii) above the amount necessary to
purchase such shares against receipt of such shares, and (B) deliver such shares
through the Securities Depository to a Buyer's Broker-Dealer (or its Agent
Member) identified to such Seller's Broker-Dealer pursuant to (a)(v) above
against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a)(vi) above the amount necessary to purchase the shares
to be purchased pursuant to (b)(i) above against receipt of such shares, and (B)
deliver such shares through the Securities Depository to the Agent Member of the
purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall instruct
the Securities Depository to execute the transactions described in (b)(i) or
(ii) above, and the Securities Depository shall execute such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(ii) above,
and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(iii) above,
and the Securities Depository shall execute such transactions.
(f) If a Beneficial Owner selling shares of AMPS in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole shares of AMPS that is less than the number of shares
that otherwise was to be purchased by such Potential Beneficial Owner. In such
event, the number of shares of AMPS to be so delivered shall be determined
solely by such Broker-Dealer. Delivery of such lesser number of shares shall
constitute good delivery. Notwithstanding the foregoing terms of this paragraph
(f), any delivery or non-delivery of shares which shall represent any departure
from the results of an Auction, as determined by the Auction Agent, shall be of
no effect unless and until the Auction Agent shall have been notified of such
delivery or non-delivery in accordance with the provisions of the Auction Agent
Agreement and the Broker-Dealer Agreements.
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APPENDIX E
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Articles
Supplementary relating to the AMPS, and will be incorporated by reference in the
Auction Agent Agreement and each Broker-Dealer Agreement. The terms not defined
below are defined in the forepart of this Prospectus. Nothing contained in this
Appendix E constitutes a representation by the Fund that in each Auction each
party referred to herein actually will perform the procedures described herein
to be performed by such party.
PARAGRAPH 10(A) CERTAIN DEFINITIONS.
As used in this Paragraph 10, the following terms shall have the following
meanings, unless the context otherwise requires:
(i) "AMPS" shall mean the shares of AMPS being auctioned pursuant to this
Paragraph 10.
(ii) "Auction Date" shall mean the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available AMPS" shall have the meaning specified in Paragraph
10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph 10(b)(i) below.
(v) "Bidder" shall have the meaning specified in Paragraph 10(b)(i) below.
(vi) "Hold Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both shall
not make such rating available, the equivalent of either or both of such ratings
by a Substitute Rating Agency or two Substitute Rating Agencies or, in the event
that only one such rating shall be available, such rating) and (ii) whether the
Fund has provided modification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net capital gains or
other taxable income will be included in such dividend on shares of AMPS as
follows:
<TABLE>
<CAPTION>
CREDIT RATING APPLICABLE APPLICABLE
- ---------------------------------------------------- PERCENTAGE OF PERCENTAGE OF
REFERENCE RATE -- ------------- -------------
REFERENCE RATE -- NO NOTIFICATION NOTIFICATION MOODY'S S&P
- --------------------------------- ----------------- ------------- -------------
<S> <C> <C> <C>
"aa3" or higher AA- or Higher 110% 150%
"a3" or "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
The Fund shall take all reasonable action necessary to enable S&P and
Moody's to provide a rating for the AMPS. If either S&P or Moody's shall not
make such a rating available, or if neither S&P nor Moody's shall make such a
rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates and successors, after consultation with the Fund, shall select a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating Agency
or Substitute Rating Agencies, as the case may be.
(viii) "Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(ix) "Sell Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(x) "Submission Deadline" shall mean 1:00 p.m., Eastern time, on any
Auction Date or such other time on any Auction Date as may be specified by the
Auction Agent from time to time as the time by which each Broker-Dealer must
submit to the Auction Agent in writing all Orders obtained by it for the Auction
to be conducted on such Auction Date.
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(xi) "Submitted Bid" shall have the meaning specified in Paragraph 10(d)(i)
below.
(xii) "Submitted Hold Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" shall have the meaning specified in Paragraph
10(d)(i) below.
PARAGRAPH 10(B) ORDERS BY BENEFICIAL OWNERS, POTENTIAL BENEFICIAL OWNERS,
EXISTING HOLDERS AND POTENTIAL HOLDERS.
(i) Unless otherwise permitted by the Fund, Beneficial Owners and Potential
Beneficial Owners may only participate in Auctions through their Broker-Dealers.
Broker-Dealers will submit the Orders of their respective customers who are
Beneficial Owners and Potential Beneficial Owners to the Auction Agent,
designating themselves as Existing Holders in respect of shares subject to
Orders submitted or deemed submitted to them by Beneficial Owners and as
Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold shares of AMPS in its
own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder on
behalf of both itself and its customers. On or prior to the Submission Deadline
on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information as
to:
(1) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for the next succeeding Dividend Period;
(2) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold,
provided that the Applicable Rate for the next succeeding Dividend Period shall
not be less than the rate per annum specified by such Beneficial Owner, and/or
(3) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner offers to sell without regard to
the Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners that
shall be maintained in good faith for the purpose of conducting a competitive
Auction, shall contact Potential Beneficial Owners, including Persons that are
not Beneficial Owners, on such list to determine the number of outstanding
shares, if any, of AMPS which each such Potential Beneficial Owner offers to
purchase, provided that the Applicable Rate for the next succeeding Dividend
Period shall not be less than the rate per annum specified by such Potential
Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this Paragraph 10(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account, is hereinafter referred to as a "Bidder"; an Order
containing the information referred to in clause (A)(1) of this Paragraph
10(b)(i) is hereinafter referred to as a "Hold Order"; an Order containing the
information referred to in clause (A)(2) or (B) of this Paragraph 10(b)(i) is
hereinafter referred to as a "Bid"; and an Order containing the information
referred to in clause (A)(3) of this Paragraph 10(b)(i) is hereinafter referred
to as a "Sell Order." Inasmuch as a Broker-Dealer participates in an Auction as
an Existing Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its customers or
itself, all
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discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of outstanding shares of AMPS specified in such Bid if the
Applicable Rate determined on such Auction Date shall be less than the rate per
annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(i)(D) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum specified
therein; or
(3) a lesser number of outstanding shares of AMPS to be determined as set
forth in Paragraph 10(e)(ii)(C) if such specified rate per annum shall be higher
than the Maximum Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of outstanding shares of AMPS specified in such Sell Order,
or
(2) such number or a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(ii)(C) if Sufficient Clearing Bids do
not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:
(1) the number of outstanding shares of AMPS specified in such Bid if the
Applicable Rate determined on such Auction Date shall be higher than the rate
per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(i)(E) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum specified
therein.
PARAGRAPH 10(C) SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Fund) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Fund);
(B) the aggregate number of outstanding shares of AMPS that are the subject
of such Order;
(C) to the extent that such Bidder is an Existing Holder
(1) the number of outstanding shares, if any, of AMPS subject to any Hold
Order placed by such Existing Holder;
(2) the number of outstanding shares, if any, of AMPS subject to any Bid
placed by such Existing Holder and the rate per annum specified in such Bid; and
(3) the number of outstanding shares, if any, of AMPS subject to any Sell
Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum
specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
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(iii) If an Order or Orders covering all of the outstanding shares of AMPS
held by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Dividend Period which is not a Special Dividend Period
of 28 days or more) and a Sell Order (in the case of an Auction relating to a
Special Dividend Period of 28 days or more) to have been submitted on behalf of
such Existing Holder covering the number of outstanding shares of AMPS held by
such Existing Holder and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Orders shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of outstanding shares of AMPS
held by such Existing Holder; provided that if more than one Hold Order is
submitted on behalf of such Existing Holder and the number of shares of AMPS
subject to such Hold Orders exceeds the number of outstanding shares of AMPS
held by such Existing Holder, the number of shares of AMPS subject to each of
such Hold Orders shall be reduced pro rata so that such Hold Orders, in the
aggregate, cover exactly the number of outstanding shares of AMPS held by such
Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per annum if
more than one Bid is submitted on behalf of such Existing Holder, up to and
including the excess of the number of outstanding shares of AMPS held by such
Existing Holder over the number of shares of AMPS subject to any Hold Order
referred to in Paragraph 10(c)(iv)(A) above (and if more than one Bid submitted
on behalf of such Existing Holder specifies the same rate per annum and together
they cover more than the remaining number of shares that can be the subject of
valid Bids after application of Paragraph 10(c)(iv)(A) above and of the
foregoing portion of this Paragraph 10(c)(iv)(B) to any Bid or Bids specifying a
lower rate or rates per annum, the number of shares subject to each of such Bids
shall be reduced pro rata so that such Bids, in the aggregate, cover exactly
such remaining number of shares); and the number of shares, if any, subject to
Bids not valid under this Paragraph 10(c)(iv)(B) shall be treated as the subject
of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the excess
of the number of outstanding shares of AMPS held by such Existing Holder over
the number of shares of AMPS subject to Hold Orders referred to in Paragraph
10(c)(iv)(A) and Bids referred to in Paragraph 10(c)(iv)(B); provided that if
more than one Sell Order is submitted on behalf of any Existing Holder and the
number of shares of AMPS subject to such Sell Orders is greater than such
excess, the number of shares of AMPS subject to each of such Sell Orders shall
be reduced pro rata so that such Sell Orders, in the aggregate, cover exactly
the number of shares of AMPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number of
shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date shall be irrevocable.
PARAGRAPH 10(D) DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE
AND APPLICABLE RATE.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding shares of AMPS over the
number of outstanding shares of AMPS that are the subject of Submitted Hold
Orders (such excess being hereinafter referred to as the "Available AMPS");
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(B) from the Submitted Orders whether the number of outstanding shares of
AMPS that are the subject of Submitted Bids by Potential Holders specifying one
or more rates per annum equal to or lower than the Maximum Applicable Rate
exceeds or is equal to the sum of:
(1) the number of outstanding shares of AMPS that are the subject of
Submitted Bids by Existing Holders specifying one or more rates per annum higher
than the Maximum Applicable Rate, and
(2) the number of outstanding shares of AMPS that are subject to Submitted
Sell Orders (if such excess or such equality exists (other than because the
number of outstanding shares of AMPS in clauses (1) and (2) above are each zero
because all of the outstanding shares of AMPS are the subject of Submitted Hold
Orders), such Submitted Bids by Potential Holders hereinafter being referred to
collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum specified
in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning Bid
Rate and all other submitted Bids from Existing Holders specifying lower rates
per annum were rejected, thus entitling such Existing Holders to continue to
hold the shares of AMPS that are the subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the Winning Bid
Rate and all other Submitted Bids from Potential Holders specifying lower rates
per annum were accepted, thus entitling the Potential Holders to purchase the
shares of AMPS that are the subject of such Submitted Bids, would result in the
number of shares subject to all Submitted Bids specifying the Winning Bid Rate
or a lower rate per annum being at least equal to the Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations pursuant
to Paragraph 10(d)(i), the Auction Agent shall advise the Fund of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for the
next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of the
outstanding shares of AMPS are the subject of Submitted Hold Orders), that the
Applicable Rate for the next succeeding Dividend Period shall be equal to the
Maximum Applicable Rate; or
(C) if all of the outstanding shares of AMPS are the subject of Submitted
Hold Orders, that the Dividend Period next succeeding the Auction automatically
shall be the same length as the immediately preceding Dividend Period and the
Applicable Rate for the next succeeding Dividend Period shall be equal to 40% of
the Reference Rate (or 60% of such rate if the Fund has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend that net capital gains or other taxable income will be included in such
dividend on shares of AMPS) on the date of the Auction.
PARAGRAPH 10(E) ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED
SELL ORDERS AND ALLOCATION OF SHARES.
Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of Paragraph 10(e)(iii) and Paragraph 10(e)(iv), Submitted Bids and Submitted
Sell Orders shall be accepted or rejected in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted and the
Submitted Bid of each of the Existing Holders specifying any rate per annum that
is higher than the Winning Bid Rate shall be accepted, thus requiring each such
Existing Holder to sell the outstanding shares of AMPS that are the subject of
such Submitted Sell Order or Submitted Bid;
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(B) the Submitted Bid of each of the Existing Holder specifying any rate
per annum that is lower than the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the outstanding shares
of AMPS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any rate
per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a rate per
annum that is equal to the Winning Bid Rate shall be rejected, thus entitling
each such Existing Holder to continue to hold the outstanding shares of AMPS
that are the subject of such Submitted Bid, unless the number of outstanding
shares of AMPS subject to all such Submitted Bids shall be greater than the
number of outstanding shares of AMPS ("Remaining Shares") equal to the excess of
the Available AMPS over the number of outstanding shares of AMPS subject to
Submitted Bids described in Paragraph 10(e)(i)(B) and Paragraph 10(e)(i)(C), in
which event the Submitted Bids of each such Existing Holder shall be accepted,
and each such Existing Holder shall be required to sell outstanding shares of
AMPS, but only in an amount equal to the difference between (1) the number of
outstanding shares of AMPS then held by such Existing Holder subject to such
Submitted Bid and (2) the number of shares of AMPS obtained by multiplying (x)
the number of Remaining Shares by (y) a fraction the numerator of which shall be
the number of outstanding shares of AMPS held by such Existing Holder subject to
such Submitted Bid and the denominator of which shall be the sum of the numbers
of outstanding shares of AMPS subject to such Submitted Bids made by all such
Existing Holders that specified a rate per annum equal to the Winning Bid Rate;
and
(E) the Submitted Bid of each of the Potential Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be accepted but only in an
amount equal to the number of outstanding shares of AMPS obtained by multiplying
(x) the difference between the Available AMPS and the number of outstanding
shares of AMPS subject to Submitted Bids described in Paragraph 10(e)(i)(B),
Paragraph 10(e)(i)(C) and Paragraph 10(e)(i)(D) by (y) a fraction the numerator
of which shall be the number of outstanding shares of AMPS subject to such
Submitted Bid and the denominator of which shall be the sum of the number of
outstanding shares of AMPS subject to such Submitted Bids made by all such
Potential Holders that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all
of the outstanding shares of AMPS are subject to Submitted Hold Orders), subject
to the provisions of Paragraph 10(e)(iii), Submitted Orders shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per annum
that is equal to or lower than the Maximum Applicable Rate shall be rejected,
thus entitling such Existing Holder to continue to hold the outstanding shares
of AMPS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
accepted, thus requiring such Potential Holder to purchase the outstanding
shares of AMPS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted and the
Submitted Sell Orders of each Existing Holder shall be accepted, in both cases
only in an amount equal to the difference between (1) the number of outstanding
shares of AMPS then held by such Existing Holder subject to such Submitted Bid
or Submitted Sell Order and (2) the number of shares of AMPS obtained by
multiplying (x) the difference between the Available AMPS and the aggregate
number of outstanding shares of AMPS subject to Submitted Bids described in
Paragraph 10(e)(ii)(A) and Paragraph 10(e)(ii)(B) by (y) a fraction the
numerator of which shall be the number of outstanding shares of AMPS held by
such Existing Holder subject to such Submitted Bid or Submitted Sell Order and
the denominator of which shall be the number of outstanding shares of AMPS
subject to all such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in Paragraph 10(e)(i) or
Paragraph 10(e)(ii), any Existing Holder would be entitled or required to sell,
or any Potential Holder would be entitled or required to
E-6
<PAGE> 112
purchase, a fraction of a share of AMPS on any Auction Date, the Auction Agent
shall, in such manner as in its sole discretion it shall determine, round up or
down the number of shares of AMPS to be purchased or sold by any Existing Holder
or Potential Holder on such Auction Date so that each outstanding share of AMPS
purchased or sold by each Existing Holder or Potential Holder on such Auction
Date shall be a whole share of AMPS.
(iv) If, as a result of the procedures described in Paragraph 10(e)(i), any
Potential Holder would be entitled or required to purchase less than a whole
share of AMPS on any Auction Date, the Auction Agent, in such manner as in its
sole discretion it shall determine, shall allocate shares of AMPS for purchase
among Potential Holders so that only whole shares of AMPS are purchased on such
Auction Date by any Potential Holder, even if such allocation results in one or
more of such Potential Holders not purchasing any shares of AMPS on such Auction
Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders
on behalf of Existing Holders or Potential Holders, the aggregate number of the
outstanding shares of AMPS to be purchased and the aggregate number of
outstanding shares of AMPS to be sold by such Potential Holders and Existing
Holders and, to the extent that such aggregate number of outstanding shares to
be purchased and such aggregate number of outstanding shares to be sold differ,
the Auction Agent shall determine to which other Broker-Dealer or Broker-Dealers
acting for one or more purchasers such Broker-Dealer shall deliver, or from
which other Broker-Dealer or Broker-Dealers acting for one or more sellers such
Broker-Dealer shall receive, as the case may be, outstanding shares of AMPS.
PARAGRAPH 10(f) MISCELLANEOUS.
The Fund may interpret the provisions of this Paragraph 10 to resolve any
inconsistency or ambiguity, remedy any formal defect or make any other change or
modification that does not substantially adversely affect the rights of
Beneficial Owners of AMPS. A Beneficial Owner or an Existing Holder (A) may
sell, transfer or otherwise dispose of shares of AMPS only pursuant to a Bid or
Sell Order in accordance with the procedures described in this Paragraph 10 or
to or through a Broker-Dealer, provided that in the case of all transfers other
than pursuant to Auctions such Beneficial Owner or Existing Holder, its
Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of
such transfer and (B) except as otherwise required by law, shall have the
ownership of the shares of AMPS held by it maintained in book entry form by the
Securities Depository in the account of its Agent Member, which in turn will
maintain records of such Beneficial Owner's beneficial ownership. Neither the
Fund nor any Affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall submit an Order in any Auction. Any Beneficial Owner that is
an Affiliate (other than Merrill Lynch, Pierce, Fenner & Smith Incorporated)
shall not sell, transfer or otherwise dispose of shares of AMPS to any Person
other than the Fund. All of the outstanding shares of AMPS of a Series shall be
represented by a single certificate registered in the name of the nominee of the
Securities Depository unless otherwise required by law or unless there is no
Securities Depository. If there is no Securities Depository, at the Fund's
option and upon its receipt of such documents as it deems appropriate, any
shares of AMPS may be registered in the Stock Register in the name of the
Beneficial Owner thereof and such Beneficial Owner thereupon will be entitled to
receive certificates therefor and required to deliver certificates thereof or
upon transfer or exchange thereof.
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<PAGE> 113
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of , 1999
Schedule of Investments as of , 1999 (unaudited)
Statement of Assets, Liabilities and Capital as of , 1999
(unaudited)
(2) Exhibits:
<TABLE>
<S> <C> <C>
(a)(1) -- Articles of Incorporation of the Registrant.(a)
(2) -- Form of Articles Supplementary creating the Series A AMPS
and Series B AMPS.
(b) -- By-Laws of the Registrant.(a)
(c) -- Not applicable.
(d)(1) -- Portions of the Articles of Incorporation, By-Laws and the
Articles Supplementary of the
Registrant defining the rights of holders of shares of the
Registrant.(b)
(2) -- Form of specimen certificate for the AMPS of the Registrant.
(e) -- Form of Automatic Dividend Reinvestment Plan.(c)
(f) -- Not applicable.
(g) -- Form of Investment Advisory Agreement between the Registrant
and Fund Asset
Management, L.P.(c)
(h)(1) -- Form of Purchase Agreement for the AMPS.
(2) -- Merrill Lynch Standard Dealer Agreement.(c)
(i) -- Not applicable.
(j) -- Form of Custodian Contract between the Registrant
and .*
(k)(1) -- Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the
Registrant and .*
(2) -- Form of Auction Agent Agreement between the Registrant and
IBJ Whitehall Bank & Trust Company.
(3) -- Form of Broker-Dealer Agreement.
(4) -- Form of Letter of Representations.
(l) -- Opinion and Consent of Brown & Wood LLP, counsel to the
Registrant.*
(m) -- Not applicable.
(n) -- Consent of , independent auditors for the
Registrant.*
(o) -- Not applicable.
(p) -- Certificate of Fund Asset Management, L.P.*
(q) -- Not applicable.
(r) -- Financial Data Schedule.*
</TABLE>
- ---------------
(a) Reference is made to the Registrant's registration statement on Form N-2,
File No. 333-77537 (the "Common Stock Registration Statement") filed with
the Securities and Exchange Commission (the "SEC") on April 30, 1999.
(b) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, previously filed as
Exhibit (a) to the Common Stock Registration Statement; and to Article II,
Article III (sections 1, 2, 3, 5 and 17), Article VI, Article VII, Article
XII, Article XIII and Article XIV of the Registrant's By-Laws, previously
filed as Exhibit (b) to the Common Stock Registration Statement. Reference
is also made to the Form of Articles Supplementary filed hereto as Exhibit
(a)(4).
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<PAGE> 114
(c) Reference is made to Pre-Effective Amendment No. 1 to the Registrant's
Common Stock Registration Statement filed with the Securities and Exchange
Commission on May 18, 1999.
* To be provided by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibit (h).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees........................................... $ *
Printing.................................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Rating Agency fees.......................................... *
Miscellaneous............................................... *
--------
Total............................................. $ *
========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the Prospectus under the captions "Investment Advisory
and Management Arrangements" and "Description of Capital Stock -- Common Stock"
and in Note 1 to the Statement of Assets, Liabilities and Capital is
incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
AT
TITLE OF CLASS 1999
-------------- --------------
<S> <C>
Common Stock, $.10 par value................................ 2
Preferred Stock, $.10 par value............................. 0
</TABLE>
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Amended and Restated Articles of Incorporation,
filed as Exhibit (a)(2) to the Common Stock Registration Statement, Article VI
of the Registrant's By-Laws, filed as Exhibit (b) to the Common Stock
Registration Statement, and the Investment Advisory Agreement, filed as Exhibit
(g) to the Common Stock Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be provided to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with any successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
Reference is made to Section 7 of the Purchase Agreement, a form of which
is filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
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<PAGE> 115
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser") acts as investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc.,
Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc., and The Municipal Fund Accumulation Program, Inc., and for the
following closed-end registered investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate
High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II,
Inc., Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida
Insured Fund III, MuniHoldings Florida Insured Fund IV, MuniHoldings Insured
Fund, Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings Michigan Insured
Fund, Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc., MuniHoldings
New York Insured Fund III, Inc., MuniHoldings Pennsylvania Insured Fund,
MuniInsured Fund, Inc., MuniVest Florida Fund, MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities Fund,
Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc., Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds
(advised by Hotchkis and Wiley, a division of MLAM); and for the following
closed-end registered investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts
as sub-
C-3
<PAGE> 116
adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Equity
Portfolio, two investment portfolios of EQ Advisors Trust.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665. The
address of the Investment Adviser, MLAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. is also P.O. Box 9011, Princeton,
New Jersey 08543-9011. The address of Princeton Funds Distributor, Inc. ("PFD")
and of Merrill Lynch Funds Distributor ("MLFD") is P.O. Box 9081, Princeton, New
Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281-1201.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged for
the past two years for his or her or its own account or in the capacity of
director, officer, employee, partner or trustee. In addition, Mr. Glenn is
President and Mr. Burke is Treasurer of all or substantially all of the
investment companies described in the first two paragraphs of this Item 30 and
also hold the same positions with all or substantially all of the investment
companies advised by MLAM as they do with those advised by the Investment
Adviser. Messrs. Giordano, Harvey, Kirstein and Monagle are officers of one or
more of such companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS
NAME INVESTMENT ADVISER PROFESSION, VOCATION OF EMPLOYMENT
---- ------------------------ ----------------------------------
<S> <C> <C>
ML&Co............................ Limited Partner Financial Services Holding
Company; Limited Partner of FAM
Princeton Services............... General Partner General Partner of MLAM
Jeffrey M. Peek.................. President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.; Managing Director and Co-Head
of the Investment Banking Division
of Merrill Lynch in 1997; Senior
Vice President and Director of the
Global Securities and Economics
Division of Merrill Lynch from
1995 to 1997.
Terry K. Glenn................... Executive Vice President Executive Vice President of MLAM;
Executive Vice President and
Director of Princeton Services;
President and Director of PFD;
Director of Financial Data
Services, Inc.; President of
Princeton Administrators, L.P.
Donald C. Burke.................. Senior Vice President, Senior Vice President and
Treasurer and Director Treasurer of MLAM; Senior Vice
of Taxation President and Treasurer of
Princeton Services; Vice President
of PFD; First Vice President of
the Investment Adviser from 1997
to 1999; Vice President of the
Investment Adviser from 1990 to
1997.
</TABLE>
C-4
<PAGE> 117
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS
NAME INVESTMENT ADVISER PROFESSION, VOCATION OF EMPLOYMENT
---- ------------------------ ----------------------------------
<S> <C> <C>
Michael G. Clark................. Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services; Treasurer and Director
of PFD; First Vice President of
the Investment Adviser from 1997
to 1999; Vice President of the
Investment Adviser from 1996 to
1997.
Linda L. Federici................ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Vincent R. Giordano.............. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Michael J. Hennewinkel........... Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of MLAM;
Secretary Senior Vice President of Princeton
Services
Philip L. Kirstein............... Senior Vice President Senior Vice President of MLAM;
Senior Vice President, General
Counsel, Director and Secretary of
Princeton Services
Ronald M. Kloss.................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Debra W. Landsman-Yaros.......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services; Vice President of PFD
Stephen M. Miller................ Senior Vice President Executive Vice President of
Princeton Administrators, L.P.;
Senior Vice President of Princeton
Services
Joseph T. Monagle, Jr............ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Brian A. Murdock................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Gregory D. Upah.................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Ronald L. Welburn................ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNT AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
promulgated thereunder are maintained at the offices of the Registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
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<PAGE> 118
ITEM 33. UNDERTAKINGS.
Registrant undertakes:
(1) For the purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as a
part of a registration statement in reliance upon Rule 430A under the
Securities Act of 1933 and contained in the form of prospectus filed by
the Registrant pursuant to Rule 497(h) under the Securities Act of 1933
shall be deemed to be part of the registration statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
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<PAGE> 119
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Township of Plainsboro,
and State of New Jersey, on the 30th day of June, 1999.
MUNIHOLDINGS NEW JERSEY INSURED FUND
IV, INC.
(Registrant)
By: /s/ TERRY K. GLENN
--------------------------------------
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K. Glenn,
Donald C. Burke or William E. Zitelli, Jr., or any of them, as attorney-in-fact,
to sign on his or her behalf, individually and in each capacity stated below,
any amendment to this Registration Statement (including post-effective
amendments) and to file the same, with all exhibits thereto, with the Securities
and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ TERRY K. GLENN President (Principal Executive June 30, 1999
- --------------------------------------------------- Officer) and Director
(Terry K. Glenn)
/s/ DONALD C. BURKE Treasurer (Principal Financial and June 30, 1999
- --------------------------------------------------- Accounting Officer)
(Donald C. Burke)
/s/ RONALD W. FORBES Director June 30, 1999
- ---------------------------------------------------
(Ronald W. Forbes)
/s/ CYNTHIA A. MONTGOMERY Director June 30, 1999
- ---------------------------------------------------
(Cynthia A. Montgomery)
/s/ CHARLES C. REILLY Director June 30, 1999
- ---------------------------------------------------
(Charles C. Reilly)
/s/ KEVIN A. RYAN Director June 30, 1999
- ---------------------------------------------------
(Kevin A. Ryan)
/s/ RICHARD R. WEST Director June 30, 1999
- ---------------------------------------------------
(Richard R. West)
/s/ ARTHUR ZEIKEL Director June 30, 1999
- ---------------------------------------------------
(Arthur Zeikel)
</TABLE>
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<PAGE> 120
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------- -----------
<S> <C>
(a)(2) -- Form of Articles Supplementary
(d)(2) -- Form of Specimen Certificate for AMPS
(h)(l) -- Form of Purchase Agreement for AMPS
(k)(2) -- Form of Auction Agent Agreement
(k)(3) -- Form of Broker-Dealer Agreement
(k)(4) -- Form of Letter of Representations
</TABLE>
<PAGE> 1
EXHIBIT(a)(2)
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
Articles Supplementary creating two series of
Auction Market Preferred Stock(R)
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC., a Maryland corporation
having its principal Maryland office in the City of Baltimore (the
"Corporation"), certifies to the State Department of Assessments and Taxation of
Maryland that:
FIRST: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by article fifth of its Charter, the Board of Directors has
reclassified _________ authorized and unissued shares of common stock of the
Corporation as preferred stock of the Corporation and has authorized the
issuance of two series of preferred stock, par value $.10 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not carried or declared) thereon, to be designated
respectively: Auction Market Preferred Stock, Series A; and Auction Market
Preferred Stock, Series B.
SECOND: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the shares
of each such series of preferred stock are as follows:
- ----------
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE> 2
DESIGNATION
Series A: A series of _______ shares of preferred stock, par value $.10
per share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon, is
hereby designated "Auction Market Preferred Stock, Series A." Each share of
Auction Market Preferred Stock, Series A (sometimes referred to herein as
"Series A AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of the
Corporation or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Articles
Supplementary. The Auction Market Preferred Stock, Series A shall constitute a
separate series of preferred stock of the Corporation, and each share of Auction
Market Preferred Stock, Series A shall be identical.
Series B: A series of _______ shares of preferred stock, par value $.10
per share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon, is
hereby designated "Auction Market Preferred Stock, Series B." Each share of
Auction Market Preferred Stock, Series B (sometimes referred to herein as
"Series B AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of the
Corporation or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Articles
Supplementary. The Auction
2
<PAGE> 3
Market Preferred Stock, Series B shall constitute a separate series of preferred
stock of the Corporation, and each share of Auction Market Preferred Stock,
Series B shall be identical.
1. Definitions. (a) Unless the context or use indicates another or
different meaning or intent, in these Articles Supplementary the following terms
have the following meanings, whether used in the singular or plural:
"'AA' Composite Commercial Paper Rate," on any date of
determination, means (i) the Interest Equivalent of the rate on commercial paper
placed on behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa"
by Moody's or the equivalent of such rating by another nationally recognized
rating agency, as such rate is made available on a discount basis or otherwise
by the Federal Reserve Bank of New York for the Business Day immediately
preceding such date, or (ii) in the event that the Federal Reserve Bank of New
York does not make available such a rate, then the arithmetic average of the
Interest Equivalent of the rate on commercial paper placed on behalf of such
issuers, as quoted on a discount basis or otherwise by Merrill Lynch, Pierce,
Fenner & Smith Incorporated or its successors that are Commercial Paper Dealers,
to the Auction Agent for the close of business on the Business Day immediately
preceding such date. If one of the Commercial Paper Dealers does not quote a
rate required to determine the "AA" Composite Commercial Paper Rate, the "AA"
Composite Commercial Paper Rate will be determined on the basis of the quotation
or quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Corporation to provide such rate or
rates not being supplied by the Commercial Paper Dealer. If the number of
Dividend Period days shall be (i) 7 or more but fewer than 49 days, such rate
shall be the Interest Equivalent of the 30-day rate on such commercial paper;
(ii) 49 or more but fewer than 70 days, such rate shall be the Interest
Equivalent of the 60-day rate on such commercial
3
<PAGE> 4
paper; (iii) 70 or more days but fewer than 85 days, such rate shall be the
arithmetic average of the Interest Equivalent on the 60-day and 90-day rates on
such commercial paper; (iv) 85 or more days but fewer than 99 days, such rate
shall be the Interest Equivalent of the 90-day rate on such commercial paper;
(v) 99 or more days but fewer than 120 days, such rate shall be the arithmetic
average of the Interest Equivalent of the 90-day and 120-day rates on such
commercial paper; (vi) 120 or more days but fewer than 141 days, such rate shall
be the Interest Equivalent of the 120-day rate on such commercial paper; (vii)
141 or more days but fewer than 162 days, such rate shall be the arithmetic
average of the Interest Equivalent of the 120-day and 180-day rates on such
commercial paper; and (viii) 162 or more days but fewer than 183 days, such rate
shall be the Interest Equivalent of the 180-day rate on such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c) of
these Articles Supplementary.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of these
Articles Supplementary.
"Adviser" means the Corporation's investment adviser which initially shall
be Fund Asset Management, L.P.
"Affiliate" means any Person, other than Merrill Lynch, Pierce, Fenner &
Smith Incorporated or its successors, known to the Auction Agent to be
controlled by, in control of, or under common control with, the Corporation.
"Agent Member" means a member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more shares of AMPS or a Potential
Beneficial Owner.
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<PAGE> 5
"AMPS" means, as the case may be, the Auction Market Preferred Stock,
Series A; or the Auction Market Preferred Stock, Series B.
"AMPS Basic Maintenance Amount," as of any Valuation Date, means the
dollar amount equal to (i) the sum of (A) the product of the number of shares of
AMPS of each series and Other AMPS Outstanding on such Valuation Date multiplied
by the sum of (a) $25,000 and (b) any applicable redemption premium attributable
to the designation of a Premium Call Period; (B) the aggregate amount of cash
dividends (whether or not earned or declared) that will have accumulated for
each share of AMPS and Other AMPS Outstanding, in each case, to (but not
including) the end of the current Dividend Period for each series of AMPS that
follows such Valuation Date in the event the then current Dividend Period will
end within 49 calendar days of such Valuation Date or through the 49th day after
such Valuation Date in the event the then current Dividend Period for each
series of AMPS will not end within 49 calendar days of such Valuation Date; (C)
in the event the then current Dividend Period will end within 49 calendar days
of such Valuation Date, the aggregate amount of cash dividends that would
accumulate at the Maximum Applicable Rate applicable to a Dividend Period of 28
or fewer days on any shares of AMPS and Other AMPS Outstanding from the end of
such Dividend Period through the 49th day after such Valuation Date, multiplied
by the larger of the Moody's Volatility Factor and the S&P Volatility Factor,
determined from time to time by Moody's and S&P, respectively (except that if
such Valuation Date occurs during a Non-Payment Period, the cash dividend for
purposes of calculation would accumulate at the then current Non-Payment Period
Rate); (D) the amount of anticipated expenses of the Corporation for the 90 days
subsequent to such Valuation Date (including any premiums payable with respect
to a Policy); (E) the amount of the Corporation's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (F) any current
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<PAGE> 6
liabilities as of such Valuation Date to the extent not reflected in any of
(i)(A) through (i)(E) (including, without limitation, and immediately upon
determination, any amounts due and payable by the Corporation pursuant to
repurchase agreements and any amounts payable for New Jersey Municipal Bonds or
Municipal Bonds purchased as of such Valuation Date) less (ii) either (A) the
Discounted Value of any of the Corporation's assets, or (B) the face value of
any of the Corporation's assets if such assets mature prior to or on the date of
redemption of AMPS or payment of a liability and are either securities issued or
guaranteed by the United States Government or Deposit Securities, in both cases
irrevocably deposited by the Corporation for the payment of the amount needed to
redeem shares of AMPS subject to redemption or to satisfy any of (i)(B) through
(i)(F). For Moody's and S&P, the Corporation shall include as a liability an
amount calculated semi-annually equal to 150% of the estimated cost of obtaining
other insurance guaranteeing the timely payment of interest on a Moody's
Eligible Asset or S&P Eligible Asset and principal thereof to maturity with
respect to Moody's Eligible Assets and S&P Eligible Assets that (i) are covered
by a Policy which provides the Corporation with the option to obtain such other
insurance and (ii) are discounted by a Moody's Discount Factor or an S&P
Discount Factor, as the case may be, determined by reference to the insurance
claims-paying ability rating of the issuer of such Policy.
"AMPS Basic Maintenance Cure Date," with respect to the failure by the
Corporation to satisfy the AMPS Basic Maintenance Amount (as required by
paragraph 7(a) of these Articles Supplementary) as of a given Valuation Date,
means the sixth Business Day following such Valuation Date.
"AMPS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any Vice President of the
Corporation which sets forth,
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<PAGE> 7
as of the related Valuation Date, the assets of the Corporation, the Market
Value and the Discounted Value thereof (seriatim and in aggregate), and the AMPS
Basic Maintenance Amount.
"Anticipation Notes" shall mean the following New Jersey Municipal Bonds:
revenue anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in paragraph 10(a)(vii)
Articles Supplementary.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the AMPS or Other AMPS, as the case may be, for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Schroder Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Directors of the Corporation or a duly
authorized committee thereof enters into an agreement with the Corporation to
follow the Auction Procedures for the purpose of determining the Applicable Rate
and to act as transfer agent, registrar, dividend disbursing agent and
redemption agent for the AMPS and Other AMPS.
"Auction Procedures" means the procedures for conducting Auctions set
forth in paragraph 10 of these Articles Supplementary.
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<PAGE> 8
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own account.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in paragraph 10 of these
Articles Supplementary, that has been selected by the Corporation and has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and
a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of these Articles Supplementary.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York are authorized or obligated by law to close.
"New Jersey Municipal Bonds" means Municipal Bonds issued by or on behalf
of the State of New Jersey, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of bond counsel to the issuer, is exempt from Federal and New Jersey
income taxes, and includes Inverse Floaters.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including these Articles Supplementary), of the Corporation on file in the
State Department of Assessments and Taxation of Maryland.
"Code" means the Internal Revenue Code of 1986, as amended.
8
<PAGE> 9
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the
Corporation may from time to time appoint, or , in lieu of any thereof, their
respective affiliates or successors.
"Common Stock" means the common stock, par value $.10 per share, of the
Corporation.
"Corporation" means MuniHoldings New Jersey insured Fund IV, Inc., a
Maryland corporation.
"Date of Original Issue" means, with respect to any share of AMPS or Other
AMPS, the date on which the Corporation originally issues such share.
"Deposit Securities" means cash and New Jersey Municipal Bonds and
Municipal Bonds rated at least A2 (having a remaining maturity of 12 months or
less), P-1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12
months or less), A-1+ or SP-1+ by S&P.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par and
the quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor.
"Dividend Payment Date," with respect to AMPS, has the meaning set forth
in paragraph 2(b)(i) of these Articles Supplementary and, with respect to Other
AMPS, has the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend
Period any Special Dividend Period.
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<PAGE> 10
"Existing Holder" means a Broker-Dealer or any such other Person as may be
permitted by the Corporation that is listed as the holder of record of shares of
AMPS in the Stock Books.
"Fitch" means Fitch IBCA, Inc. or its successors.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of these
Articles Supplementary.
"Holder" means a Person identified as a holder of record of shares of AMPS
in the Stock Register.
"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Corporation, an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date as
determined by the Board of Directors of the Corporation with respect to each
series of AMPS or other AMPS, as the case may be.
"Initial Dividend Period," with respect to each series of AMPS, has the
meaning set forth in paragraph 2(c)(i) of these Articles Supplementary and, with
respect to Other AMPS, has the equivalent meaning.
"Initial Dividend Rate," with respect to each series of AMPS, means the
rate per annum applicable to the Initial Dividend Period for such series of AMPS
and, with respect to Other AMPS, has the equivalent meaning.
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<PAGE> 11
"Initial Margin" means the amount of cash or securities deposited with a
broker margin payment at the time of purchase or sale of a futures contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"Inverse Floaters" means trust certificates or other instruments
evidencing interests in one or more New Jersey Municipal Bonds that are S&P
Eligible Assets the interest rates on which are adjusted at short term intervals
on a basis that is inverse to the simultaneous readjustment of the interest
rates on corresponding floating rate trust certificates or other instruments
issued by the same issuer, provided that the ratio of the aggregate dollar
amount of floating rate instruments to inverse floating rate instruments issued
by the same issuer does not exceed one to one at their time of original issuance
unless the floating rate instruments have only one reset remaining until
maturity.
"Long Term Dividend Period" means a Special Dividend Period consisting of
a specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of AMPS plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption and excluding Additional Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
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<PAGE> 12
"Market Value" of any asset of the Corporation shall be the market value
thereof determined by the Pricing Service. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service shall value portfolio
securities at the quoted bid prices or the mean between the quoted bid and asked
price or the yield equivalent when quotations are not readily available.
Securities for which quotations are not readily available shall be valued at
fair value as determined by the Pricing Service using methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
type of issue, coupon, maturity and rating; indications as to value from
dealers; and general market conditions. The Pricing Service may employ
electronic data processing techniques and/or a matrix system to determine
valuations. In the event the Pricing Service is unable to value a security, the
security shall be valued at the lower of two dealer bids obtained by the
Corporation from dealers who are members of the National Association of
Securities Dealers, Inc. and who make a market in the security, at least one of
which shall be in writing. Futures contracts and options are valued at closing
prices for such instruments established by the exchange or board of trade on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Board of Directors.
"Maximum Applicable Rate," with respect to AMPS, has the meaning set forth
in paragraph 10(a)(vii) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due if
the Corporation were to make Retroactive Taxable Allocations, with respect to
any fiscal year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable
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<PAGE> 13
income earned by the Corporation, as of the end of the calendar month
immediately preceding such Valuation Date and assuming such Additional Dividends
are fully taxable.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the
Discounted Value of any New Jersey Municipal Bond or Municipal Bond which
constitutes a Moody's Eligible Asset, the percentage determined by reference to
(a)(i) the rating by Moody's or S&P on such Bond or (ii) in the event the
Moody's Eligible Asset is insured under a Policy and the terms of the Policy
permit the Corporation, at its option, to obtain other insurance guaranteeing
the timely payment of interest on such Moody's Eligible Asset and principal
thereof to maturity, the Moody's insurance claims-paying ability rating of the
issuer of the Policy or (iii) in the event the Moody's Eligible Asset is insured
under an insurance policy which guarantees the timely payment of interest on
such Moody's Eligible Asset and principal thereof to maturity, the Moody's
insurance claims-paying ability rating of the issuer of the insurance policy
(provided that for purposes of clauses (ii) and (iii) if the insurance
claims-paying ability of an issuer of a Policy or insurance policy is not rated
by Moody's but is rated by S&P, such issuer shall be deemed to have a Moody's
insurance claims-paying ability rating which is two full categories lower than
the S&P insurance claims-paying ability rating) and (b) the Moody's Exposure
Period, in accordance with the table set forth below:
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<PAGE> 14
<TABLE>
<CAPTION>
Rating Category
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG-1** SP-1+***
- ----------------------- ---- --- -- ---- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less.................... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater than
seven weeks........................ 154 164 173 205 235 137 149
9 weeks or less but greater than
eight weeks........................ 158 169 179 209 242 138 150
</TABLE>
- ----------
* Moody's rating.
** New Jersey Municipal Bonds and Municipal Bonds not rated by Moody's but rated
BBB or BBB+ by S&P.
*** New Jersey Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-1
or, if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not mature or
have a demand feature at par exercisable within the Moody's Exposure Period and
which do not have a long-term rating. For the purposes of the definition of
Moody's Eligible Assets, these securities will have an assumed rating of "A" by
Moody's.
; provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-paying
ability rating in accordance with clause (a)(ii) or (a)(iii), such Moody's
Discount Factor shall be increased by an amount equal to 50% of the difference
between (a) the percentage set forth in the foregoing table under the applicable
rating category and (b) the percentage set forth in the foregoing table under
the rating category which is one category lower than the applicable rating
category.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term New Jersey Municipal Bonds and short-term Municipal Bonds,
so long as such New Jersey Municipal Bonds and Municipal Bonds are rated at
least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and the Moody's Discount Factor
for such Bonds will be 125% if such Bonds are not rated by Moody's but are rated
A-1+ or SP-1+ or AA by S &P and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and (ii) no Moody's Discount
Factor will be applied to cash or to Receivables for New Jersey Municipal Bonds
or Municipal Bonds Sold. "Receivables for New Jersey Municipal Bonds or
Municipal Bonds Sold," for
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<PAGE> 15
purposes of calculating Moody's Eligible Assets as of any Valuation Date, means
no more than the aggregate of the following: (i) the book value of receivables
for New Jersey Municipal Bonds or Municipal Bonds sold as of or prior to such
Valuation Date if such receivables are due within five Business Days of such
Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Corporation has
received prior written authorization from Moody's or (y) with counterparties
having a Moody's long-term debt rating of at least Baa3; and (ii) the Moody's
Discounted Value of New Jersey Municipal Bonds or Municipal Bonds sold as of or
prior to such Valuation Date which generated receivables, if such receivables
are due within five Business Days of such Valuation Date but do not comply with
either of conditions (x) or (y) of the preceding clause (i).
"Moody's Eligible Asset" means cash, Receivables for New Jersey Municipal
Bonds or Municipal Bonds Sold, a New Jersey Municipal Bond or a Municipal Bond
that (i) pays interest in cash, (ii) is publicly rated Baa or higher by Moody's
or, if not rated by Moody's but rated by S&P, is rated at least BBB by S&P
(provided that, for purposes of determining the Moody's Discount Factor
applicable to any such S&P-rated New Jersey Municipal Bond or S&P-rated
Municipal Bond, such New Jersey Municipal Bond or Municipal Bond (excluding any
short-term New Jersey Municipal Bond or Municipal Bond) will be deemed to have a
Moody's rating which is one full rating category lower than its S&P rating),
(iii) does not have its Moody's rating suspended by Moody's; and (iv) is part of
an issue of New Jersey Municipal Bonds or Municipal Bonds of at least
$10,000,000. In addition, New Jersey Municipal Bonds and Municipal Bonds in the
Corporation's portfolio must be within the following diversification
requirements in order to be included within Moody's Eligible Assets:
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<PAGE> 16
<TABLE>
<CAPTION>
Minimum Maximum Maximum Maximum Maximum
Issue Size Underlying Issue Type County State or Territory
($ Millions) Obligor(%)(1) Concentration(%)(1)(3) Concentration(%)(1)(4) Concentration(1)(5)
------------ ------------- ---------------------- ---------------------- -------------------
<S> <C> <C> <C> <C> <C>
Aaa ...... 10 100 100 100 100
Aa........ 10 20 60 60 60
A ........ 10 10 40 40 40
Baa ...... 10 6 20 20 20
Other(2) . 10 4 12 12 12
</TABLE>
- ----------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) New Jersey Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to New Jersey Municipal Bonds. Territorial bonds (other
than those issued by Puerto Rico and counted collectively) are each
limited to 10% of Moody's Eligible Assets. For diversification purposes,
Puerto Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described above, any
New Jersey Municipal Bond or Municipal Bond backed by the guaranty, letter of
credit or insurance issued by a third party will be deemed to be issued by such
third party if the issuance of such third party credit is the sole determinant
of the rating on such Bond. For purposes of the issue type concentration
requirement described above, New Jersey Municipal Bonds and Municipal Bonds will
be classified within one of the following categories: health care issues
(teaching and non-teaching hospitals, public and private), housing issues
(single- and multi-family), educational facilities issues (public and private
schools), student loan issues, resource recovery issues, transportation issues
(mass transit, airport and highway bonds), industrial revenue/pollution control
bond issues, utility issues (including water, sewer and electricity), general
obligation issues, lease obligations/certificates of participation, escrowed
bonds and other issues ("Other Issues") not falling within one of the
aforementioned categories (includes special obligations to crossover, excise and
sales tax revenue, recreation revenue, special assessment and telephone revenue
bonds). In no event shall (a) more than 10% of Moody's Eligible Assets consist
of student loan issues, (b) more than 10% of Moody's Eligible Assets consist of
resource recovery issues or (c) more than 10% of Moody's Eligible Assets consist
of Other Issues.
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<PAGE> 17
When the Corporation sells a New Jersey Municipal Bond or Municipal Bond
and agrees to repurchase it at a future date, the Discounted Value of such Bond
will constitute a Moody's Eligible Asset and the amount the Corporation is
required to pay upon repurchase of such Bond will count as a liability for
purposes of calculating the AMPS Basic Maintenance Amount. When the Corporation
purchases a New Jersey Municipal Bond or Municipal Bond and agrees to sell it at
a future date to another party, cash receivable by the Corporation thereby will
constitute a Moody's Eligible Asset if the long-term debt of such other party is
rated at least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such Bond will constitute a Moody's Eligible
Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward Commitment
or (iv) irrevocably deposited by the Corporation for the payment of dividends or
redemption.
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and shall initially be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth in paragraph 8(b)
of these Articles Supplementary.
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<PAGE> 18
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
<TABLE>
<CAPTION>
% Change in Marginal Moody's Volatility
Tax Rate Factor
-------- ------
<S> <C>
Less than or equal to 5% 292%
>5% but Less than or equal to 10% 313%
>10% but Less than or equal to 15% 338%
>15% but Less than or equal to 20% 364%
>20% but Less than or equal to 25% 396%
>25% but Less than or equal to 30% 432%
>30% but Less than or equal to 35% 472%
>35% but Less than or equal to 40% 520%
</TABLE>
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such other
potential dividend rate increase factor as Moody's advises the Corporation in
writing is applicable.
"Municipal Bonds" means "Municipal Bonds" as defined in the Corporation's
Registration Statement on Form N-2 (File No. ) relating to the AMPS on file
with the Securities and Exchange Commission, as such Registration Statement may
be amended from time to time, as well as short-term municipal obligations.
"Municipal Index" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act AMPS Asset Coverage" means asset coverage, as defined in section
18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Corporation which are stock, including all outstanding shares
of AMPS and Other AMPS (or such other asset coverage as may in the future be
specified in or under the 1940 Act as the minimum asset
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<PAGE> 19
coverage for senior securities which are stock of a closed-end investment
company as a condition of paying dividends on its common stock).
"1940 Act Cure Date," with respect to the failure by the Corporation to
maintain the 1940 Act AMPS Asset Coverage (as required by paragraph 6 of these
Articles Supplementary) as of the last Business Day of each month, means the
last Business Day of the following month.
"New Jersey Municipal Bonds" means Municipal Bonds issued by or on behalf
of the State of New Jersey, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of bond counsel to the issuer, is exempt from Federal and New Jersey
income taxes, and includes Inverse Floaters.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."
"Non-Payment Period" means, with respect to each series of AMPS, any
period commencing on and including the day on which the Corporation shall fail
to (i) declare, prior to the close of business on the second Business Day
preceding any Dividend Payment Date, for payment on or (to the extent permitted
by paragraph 2(c)(i) of these Articles Supplementary) within three Business Days
after such Dividend Payment Date to the Holders as of 12:00 noon, New York City
time, on the Business Day preceding such Dividend Payment Date, the full amount
of any dividend on shares of AMPS payable on such Dividend Payment Date or (ii)
deposit, irrevocably in trust, in same-day funds, with the Auction Agent by
12:00 noon, New York- City time, (A) on such Dividend Payment Date the full
amount of any cash dividend on such shares payable (if declared) on such
Dividend Payment Date or (B) on any redemption date for any shares of AMPS
called for redemption, the Mandatory Redemption Price per share of
19
<PAGE> 20
such AMPS or, in the case of an optional redemption, the Optional Redemption
Price per share, and ending on and including the Business Day on which, by 12:00
noon, New York City time, all unpaid cash dividends and unpaid redemption prices
shall have been so deposited or shall have otherwise been made available to
Holders in same-day funds; provided that, a Non-Payment Period shall not end
unless the Corporation shall have given at least five days' but no more than 30
days' written notice of such deposit or availability to the Auction Agent, all
Existing Holders (at their addresses appearing in the Stock Books) and the
Securities Depository. Notwithstanding the foregoing, the failure by the
Corporation to deposit funds as provided for by clause (ii)(A) or (ii)(B) above
within three Business Days after any Dividend Payment Date or redemption date,
as the case may be, in each case to the extent contemplated by paragraph 2(c)(1)
of these Articles Supplementary, shall not constitute a "Non-Payment Period."
"Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Corporation has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of AMPS), provided that the Board of Directors of the Corporation shall
have the authority to adjust, modify, alter or change from time to time the
initial Non-Payment Period Rate if the Board of Directors of the Corporation
determines and Moody's and S&P (and any Substitute Rating Agency in lieu of
Moody's or S&P in the event either of such parties shall not rate the AMPS)
advise the Corporation in writing that such adjustment, modification, alteration
or change will not adversely affect their then-current ratings on the AMPS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of these Articles Supplementary.
20
<PAGE> 21
"Notice of Redemption" means any notice with respect to the redemption of
shares AMPS pursuant to paragraph 4 of these Articles Supplementary.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii) of
these Articles Supplementary.
"Notice of Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of these Articles Supplementary.
"Optional Redemption Price" means $25,000 per share plus an amount equal
to accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption and excluding Additional Dividends plus any applicable
redemption premium attributable to the designation of a Premium Call Period.
"Other AMPS" means the auction rate preferred stock of the Corporation,
other than the AMPS.
"Outstanding" means, as of any date (i) with respect to AMPS, shares of
AMPS theretofore issued by the Corporation except, without duplication, (A) any
shares of AMPS theretofore cancelled or delivered to the Auction Agent for
cancellation, or redeemed by the Corporation, or as to which a Notice of
Redemption shall have been given and Deposit Securities shall have been
deposited in trust or segregated by the Corporation pursuant to paragraph 4(c)
and (B) any shares of AMPS as to which the Corporation or any Affiliate thereof
shall be a Beneficial Owner, provided that shares of AMPS held by an Affiliate
shall be deemed outstanding for purposes of calculating the AMPS Basic
Maintenance Amount and (ii) with respect to shares of other Preferred Stock, has
the equivalent meaning.
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<PAGE> 22
"Parity Stock" means the AMPS and each other outstanding series of
Preferred Stock the holders of which, together with the holders of the AMPS,
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to the
full respective preferential amounts to which they are entitled, without
preference or priority one over the other.
"Person" means and includes an individual, a partnership, a corporation, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Policy" means an insurance policy purchased by the Corporation which
guarantees the payment of principal and interest on specified New Jersey
Municipal Bonds or Municipal Bonds during the period in which such New Jersey
Municipal Bonds or Municipal Bonds are owned by the Corporation; provided,
however, that, as long as the AMPS are rated by Moody's and S&P, the Corporation
will not obtain any Policy unless Moody's and S&P advise the Corporation in
writing that the purchase of such Policy will not adversely affect their
then-current rating on the AMPS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other Person as may
be permitted by the Corporation, including any Existing Holder, who may be
interested in acquiring shares of AMPS (or, in the case of an Existing Holder,
additional shares of AMPS).
22
<PAGE> 23
"Preferred Stock" means the preferred stock, par value $.10 per share, of
the Corporation, and includes AMPS and Other AMPS.
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."
"Pricing Service" means J.J. Kenny or any pricing service designated by
the Board of Directors of the Corporation provided the Corporation obtains
written assurance from S&P and Moody's that such designation will not impair the
rating then assigned by S&P and Moody's to the AMPS.
"Quarterly Valuation Date" means the twenty-fifth day of the last month of
each fiscal quarter of the Corporation (or, if such day is not a Business Day,
the next succeeding Business Day) in each fiscal year of the Corporation,
commencing ______________, 1999.
"Receivables for New Jersey Municipal Bonds Sold" has the meaning set
forth under definition of S&P Discount Factor.
"Receivables for New Jersey Municipal Bonds or Municipal Bonds Sold" has
the meaning set forth under the definition of Moody's Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial
Paper Rate, (iii) with respect to any Short Term Dividend Period having
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<PAGE> 24
183 or more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and
(iv) with respect to any Long Term Dividend Period, the applicable U.S. Treasury
Note Rate.
"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.
"Response" has the meaning set forth in paragraph 2(c)(iii) of these A
Supplementary.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of these Articles Supplementary.
"Right," with respect to each series of AMPS, has the meaning set forth in
paragraph 2(e) of these Articles Supplementary and, with respect to Other AMPS,
has the equivalent meaning.
"S&P" means Standard & Poor's, a division of the McGraw Hill Companies or
its successors.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any New Jersey Municipal Bond which constitutes an S&P Eligible Asset,
the percentage determined by reference to (a)(i) the rating by S&P, Moody's or
Fitch on such Bond or (ii) in the event the New Jersey Municipal Bond is insured
under a Policy and the terms of the Policy permit the Corporation, at its
option, to obtain other permanent insurance guaranteeing the timely payment of
interest on such New Jersey Municipal Bond and principal thereof to maturity,
the S&P insurance claims-paying ability rating of the issuer of the Policy or
(iii) in the event the New Jersey Municipal Bond is insured under an insurance
policy which guarantees the timely payment of interest on such New Jersey
Municipal Bond and principal thereof to maturity, the
24
<PAGE> 25
S&P insurance claims-paying ability rating of the issuer of the insurance policy
and (b) the S&P Exposure Period, in accordance with the tables set forth below:
25
<PAGE> 26
For New Jersey Municipal Bonds:
<TABLE>
<CAPTION>
Rating Category
S&P Exposure Period AAA* AA* A* BBB*
-----------------------------------------------
<S> <C> <C> <C> <C>
45 Business Days 202% 207% 222% 262%
25 Business Days 182 187 202 242
10 Business Days 167 172 187 227
7 Business Days 162 167 182 222
3 Business Days 142 147 162 202
</TABLE>
- ----------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
New Jersey Municipal Bonds will be 115 %, so long as such New Jersey Municipal
Bonds are rated A- 1+ or SP-1+ by S&P and mature or have a demand feature
exercisable in 30 days or less, or 120% so long as such New Jersey Municipal
Bonds are rated A-1 or SP-1 by S&P and mature or have a demand feature
exercisable in 30 days or less, or 125% if such New Jersey Municipal Bonds are
not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's or F-1+ by Fitch;
provided, however, such short-term New Jersey Municipal Bonds rated by Moody's
or Fitch but not rated by S&P having a demand feature exercisable in 30 days or
less must be backed by a letter of credit, liquidity facility or guarantee from
a bank or other financial institution having a short-term rating of at least
A-l+ from S&P; and further provided that such short-term New Jersey Municipal
Bonds rated by Moody's or Fitch but not rated by S&P may comprise no more than
50% of short-term New Jersey Municipal Bonds that qualify as S&P Eligible
Assets, (ii) the S&P Discount Factor for Receivables for New Jersey Municipal
Bonds Sold that are due in more than five Business Days from such Valuation Date
will be the S&P Discount Factor applicable to the New Jersey Municipal Bonds
sold, and (iii) no S&P Discount Factor will be applied to cash or to Receivables
for New Jersey Municipal Bonds Sold if such receivables are due within five
Business Days of such Valuation Date. "Receivables for New Jersey Municipal
Bonds Sold,"
26
<PAGE> 27
for purposes of calculating, S&P Eligible Assets as of any Valuation Date, means
the book value of receivables for New Jersey Municipal Bonds sold as of or prior
to such Valuation Date. The Corporation may adopt S&P Discount Factors for
Municipal Bonds other than New Jersey Municipal Bonds provided that S&P advises
the Corporation in writing that such action will not adversely affect its then
current rating on the AMPS. For purposes of the foregoing, Anticipation Notes
rated SP-1 or, if not rated by S&P, rated VMIG-1 by Moody's or F-1+ by Fitch,
which do not mature or have a demand feature exercisable in 30 days and which do
not have a long-ten-n rating, shall be considered to be short-term New Jersey
Municipal Bonds.
"S&P Eligible Asset" means cash, Receivables for New Jersey Municipal
Bonds Sold or a New Jersey Municipal Bond that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to principal and
interest in United States Dollars; (iii) is publicly rated BBB or higher by S&P
or, except in the case of Anticipation Notes that are grant anticipation notes
or bond anticipation notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by Moody's or Fitch, is rated at
least A by Moody's or Fitch (provided that such Moody's-rated or Fitch-rated New
Jersey Municipal Bonds will be included in S&P Eligible Assets only to the
extent the Market Value of such New Jersey Municipal Bonds does not exceed 50%
of the aggregate Market Value of the S&P Eligible Assets; and further provided
that, for purposes of determining the S&P Discount Factor applicable to any such
Moody's-rated or Fitch-rated New Jersey Municipal Bond, such New Jersey
Municipal Bond will be deemed to have an S&P rating which is one full rating
category lower than its Moody's rating or Fitch rating); (iv) is not subject to
a covered call or covered put option written by the Corporation; (v) except for
Inverse Floaters, is not part of a private placement of New Jersey Municipal
Bonds; and (vi) except for Inverse Floaters, is part of an
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<PAGE> 28
issue of New Jersey Municipal Bonds with an original issue size of at least $10
million or, if of an issue with an original issue size below $10 million (but in
no event below $5 million), is either (a) issued by an issuer with a total of at
least $25 million of securities outstanding, or (b) rated at least A by S&P with
all such New Jersey Municipal Bonds not constituting more than 20% of the
aggregate Market Value of S&P Eligible Assets. Notwithstanding the foregoing:
(1) New Jersey Municipal Bonds of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only to the
extent the Market Value of such New Jersey Municipal Bonds does not exceed 10%
of the aggregate Market Value of the S&P Eligible Assets, provided that 2% is
added to the applicable S&P Discount Factor for every 1% by which the Market
Value of such New Jersey Municipal Bonds exceeds 5% of the aggregate Market
Value of the S&P Eligible Assets;
(2) New Jersey Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the extent the
Market Value of such Bonds does not exceed 25% of the aggregate Market Value of
S&P Eligible Assets, except that New Jersey Municipal Bonds falling within the
utility issue type category will be broken down into three sub-categories (as
described below) and such New Jersey Municipal Bonds will be considered S&P
Eligible Assets to the extent the Market Value of such Bonds in each such
sub-category does not exceed 25% of the aggregate Market Value of S&P Eligible
Assets, except that New Jersey Municipal Bonds falling within the transportation
issue type category will be broken down into two sub-categories (as described
below) and such New Jersey Municipal Bonds will be considered S&P Eligible
Assets to the extent the Market Value of such Bonds in both sub-categories
combined (as described below) does not exceed 40% of the aggregate Market Value
of S&P Eligible Assets and except that New Jersey Municipal Bonds falling within
the general
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<PAGE> 29
obligation issue type category will be considered S&P Eligible Assets to the
extent the Market Value of such Bonds does not exceed 50% of the aggregate
Market Value of S&P Eligible Assets. For purposes of the issue type category
requirement described above, New Jersey Municipal Bonds will be classified
within one of the following categories: health care issues, housing issues,
educational facilities issues, student loan issues, transportation issues,
industrial development bond issues, utility issues, general obligation issues,
lease obligations, escrowed bonds and other issues not falling within one of the
aforementioned categories. The general obligation issue type category includes
any issuer that is directly or indirectly guaranteed by the State of New Jersey
or its political subdivisions. Utility issuers are included in the general
obligation issue type category if the issuer is directly or indirectly
guaranteed by the State of New Jersey or its political subdivisions. For
purposes of the issue type category requirement described above, New Jersey
Municipal Bonds in the utility issue type category will be classified within one
of the three following sub-categories: (i) electric, gas and combination issues
(if the combination issue includes an electric issue), (ii) water and sewer
utilities and combination issues (if the combination issue does not include an
electric issue), and (iii) irrigation, resource recovery, solid waste and other
utilities, provided that New Jersey Municipal Bonds included in this
sub-category (iii) must be rated by S&P in order to be included in S&P Eligible
Assets. For purposes of the issue type category requirement described above, New
Jersey Municipal Bonds in the transportation issue type category will be
classified within one of the two following sub-categories: (i) streets and
highways, toll roads, bridges and tunnels, airports and multipurpose port
authorities (multiple revenue streams generated by toll roads, airports, real
estate, bridges), (ii) mass transit, parking, seaports and others. Exposure to
transportation sub-category (i) in the preceding sentence is limited to 25% of
the aggregate Market Value of S&P Eligible
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<PAGE> 30
Assets, provided, however, exposure to transportation sub-category (ii) in the
preceding sentence can exceed the 25% limit to the extent that exposure to
transportation sub-category (ii) is reduced, for a total exposure up to and not
exceeding 40% of the aggregate Market Value of S&P Eligible Assets for the
transportation issue type category; and
(3) New Jersey Municipal Bonds which are escrow bonds or defeased
bonds may compose up to 100% of the aggregate Market Value of S&P Eligible
Assets if such Bonds initially are assigned a rating by S&P in accordance with
S&P's legal defeasance criteria or rerated by S&P as economic defeased escrow
bonds and assigned an AAA rating. New Jersey Municipal Bonds may be rated as
escrow bonds by another nationally recognized rating agency or rerated as an
escrow bond and assigned the equivalent of an S&P AAA rating, provided that such
equivalent rated Bonds are limited to 50% of the aggregate Market Value of S&P
Eligible Assets and are deemed to have an AA S&P rating for purposes of
determining the S&P Discount Factor applicable to such New Jersey Municipal
Bonds. The limitations on New Jersey Municipal Bonds of any one issuer in clause
(1) above is not applicable to escrow bonds, however, economically defeased
bonds that are either initially rate or rerated by S&P or another nationally
recognized rating agency and assigned the same rating level as the issuer of the
Bonds will remain in its original issue type category set forth in clause (2)
above. New Jersey Municipal Bonds that are legally defeased and secured by
securities issued or guaranteed by the United States Government are not required
to meet the minimum issuance size requirement set forth above.
The Corporation may include Municipal Bonds other than New Jersey
Municipal Bonds as S&P Eligible Assets pursuant to guidelines and restrictions
to be established by S&P provided
30
<PAGE> 31
that S&P advises the Corporation in writing that such action will not adversely
affect its then current rating on the AMPS.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance Cure
Date, that the Corporation has under these Articles Supplementary to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the AMPS Basic Maintenance Amount (as described in
paragraph 7(a) of these Articles Supplementary).
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a) of
these Articles Supplementary.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Corporation in writing is applicable.
"Securities Depository" means The Depository Trust Company or any
successor company or other entities elected by the Corporation as securities
depository for the shares of AMPS that agrees to follow the procedures required
to be followed by such securities depository in connection with the shares of
AMPS.
"Service" means the United States Internal Revenue Service.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" means a Special Dividend Period consisting of
a specified number of days (other than seven) evenly divisible by seven and not
fewer than seven nor more than 364.
31
<PAGE> 32
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364 or (ii) a specified period of one whole year
or more but not greater than five years (in each case subject to adjustment as
provided in paragraph 2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Directors of the Corporation, after consultation with
the Auction Agent and the Broker-Dealers, during which the shares of AMPS
subject to such Dividend Period shall not be subject to redemption at the option
of the Corporation and (ii) a period (a "Premium Call Period"), consisting of a
number of whole years and determined by the Board of Directors of the
Corporation, after consultation with the Auction Agent and the Broker-Dealers,
during each year of which the shares of AMPS subject to such Dividend Period
shall be redeemable at the Corporation's option at a price per share equal to
$25,000 plus accumulated but unpaid dividends plus a premium expressed as a
percentage of $25,000, as determined by the Board of Directors of the
Corporation after consultation with the Auction Agent and the Broker-Dealers.
"Stock Books" means the books maintained by the Auction Agent setting
forth at all times a current list, as determined by the Auction Agent, of
Existing Holders of the AMPS.
"Stock Register" means the register of Holders maintained on behalf of the
Corp by the Auction Agent in its capacity as transfer agent and registrar for
the AMPS.
"Subsequent Dividend Period," with respect to AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
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<PAGE> 33
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Corporation may from time to time appoint or, in
lieu of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its affiliates and successors,
after consultation with the Corporation, to act as the substitute rating agency
or substitute rating agencies, as the case may be, to determine the credit
ratings of the shares of AMPS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30-day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., New York City
time, on such date by Kenny Information Systems Inc. or any successor thereto,
based upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Code of "high
grade" component issuers selected by Kenny Information Systems Inc. or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the Marginal Tax Rate
(expressed as a decimal); provided, however, that if the Kenny Index is not made
so available by 8:30 A.M., New York City time, on such date by Kenny Information
Systems Inc. or any successor, the
33
<PAGE> 34
Taxable Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient
of (A) the per annum rate expressed on an interest equivalent basis equal to the
most recent Kenny Index so made available for any preceding Business Day,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal). The
Corporation may not utilize a successor index to the Kenny Index unless Moody's
and S&P provide the Corporation with written confirmation that the use of such
successor index will not adversely affect the then-current respective Moody's
and S&P ratings of the AMPS.
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate" on
any date means the Interest Equivalent of the yield as calculated by reference
to the arithmetic average of the bid price quotations of the actively traded
Treasury Bill with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by bid price quotations as of any time on
the Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most
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<PAGE> 35
nearly comparable to the length of the related Dividend Period, as such bid
price quotation is published on the Business Day immediately preceding such date
by the Federal Reserve Bank of New York in its Composite 3:30 P.M. Quotations
for U.S. Government Securities report for such Business Day, or (ii) if such
yield as so calculated is not available, the Alternate Treasury Note Rate on
such date. "Alternate Treasury Note Rate" on any date means the yield as
calculated by reference to the arithmetic average of the bid price quotations of
the actively traded, current coupon Treasury Note with a maturity most nearly
comparable to the length of the related Dividend Period, as determined by the
bid price quotations as of any time on the Business Day immediately preceding
such date, obtained from at least three recognized primary U.S. Government
securities dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether the
Corporation is maintaining the AMPS Basic Maintenance Amount, each Business Day
commencing with the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Corporation, the amount of cash or securities paid
to or received from a broker (subsequent to the Initial Margin payment) from
time to time as the price of such futures contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, AMPS Basic
Maintenance Amount, AMPS Basic Maintenance Cure Date, AMPS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Inverse Floaters, Market Value, Maximum Potential Additional Dividend
Liability, Moody's Discount Factor, Moody's Eligible Asset, Moody's Exposure
Period, Moody's Hedging Transactions, Moody's
35
<PAGE> 36
Volatility Factor, S&P Discount Factor, S&P Eligible Asset, S&P Exposure Period,
S&P Hedging Transactions, S&P Volatility Factor, Valuation Date and Variation
Margin have been determined by the Board of Directors of the Corporation in
order to obtain a "aaa" rating from Moody's and a AAA rating from S&P on the
AMPS on their Date of Original Issue; and the Board of Directors of the
Corporation shall have the authority, without shareholder approval, to amend,
alter or repeal from time to time the foregoing definitions and the restrictions
and guidelines set forth thereunder if Moody's and S&P or any Substitute Rating
Agency advises the Corporation in writing that such amendment, alteration or
repeal will not adversely affect their then current ratings on the AMPS.
2. Dividends. (a) The Holders shall be entitled to receive, when, as and
if declared by the Board of Directors of the Corporation, out of funds legally
available therefor, cumulative dividends each consisting of (i) cash at the
Applicable Rate, (ii) a Right to receive cash as set forth in paragraph 2(e)
below, and (iii) any additional amounts as set forth in paragraph 2(f) below,
and no more, payable on the respective dates set forth below. Dividends on the
shares of AMPS so declared and payable shall be paid (i) in preference to and in
priority over any dividends declared and payable on the Common Stock, and (ii)
to the extent permitted under the Code and to the extent available, out of net
tax-exempt income earned on the Corporation's investments. To the extent
permitted under the Code, dividends on shares of AMPS will be designated as
exempt-interest dividends. For the purposes of this section, the term "net
tax-exempt income" shall exclude capital gains of the Corporation.
(b) (i) Cash dividends on shares of AMPS shall accumulate from the Date of
Original Issue and shall be payable, when, as and if declared by the Board of
Directors, out of funds legally available therefor, commencing on the Initial
Dividend Payment Date with respect
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<PAGE> 37
to each series of AMPS. Following the Initial Dividend Payment Date for each
series of AMPS, dividends on each series of AMPS will be payable, at the option
of the Corporation, either (i) with respect to any 7-Day Dividend Period and any
Short Term Dividend Period of 35 or fewer days, on the day next succeeding the
last day thereof or (ii) with respect to any Short Term Dividend Period of more
than 35 days and with respect to any Long Term Dividend Period, monthly on the
first Business Day of each calendar month during such Short Term Dividend Period
or Long Term Dividend Period and on the day next succeeding the last day thereof
(each such date referred to in clause (i) or (ii) being herein referred to as a
"Normal Dividend Payment Date"), except that if such Normal Dividend Payment
Date is not a Business Day, then the Dividend Payment Date shall be the first
Business Day next succeeding such Normal Dividend Payment Date. Although any
particular Dividend Payment Date may not occur on the originally scheduled date
because of the exceptions discussed above, the next succeeding Dividend Payment
Date, subject to such exceptions, will occur on the next following originally
scheduled date. If for any reason a Dividend Payment Date cannot be fixed as
described above, then the Board of Directors shall fix the Dividend Payment
Date. The Board of Directors by resolution prior to authorization of a dividend
by the Board of Directors may change a Dividend Payment Date if such change does
not adversely affect the contract rights of the Holders of shares of AMPS set
forth in the Charter. The Initial Dividend Period, 7-Day Dividend Periods and
Special Dividend Periods are hereinafter sometimes referred to as Dividend
Periods. Each dividend payment date determined as provided above is hereinafter
referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in
the Stock Register as of 12:00 noon, New York City time, on the Business Day
preceding the
37
<PAGE> 38
Dividend Payment Date. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to the Holders as they appear on the Stock Register on a date, not
exceeding 15 days prior to the payment date therefor, as may be fixed by the
Board of Directors of the Corporation.
(c) (i) During the period from and including the Date of Original Issue to
but excluding the Initial Dividend Payment Date for each series of AMPS (the
"Initial Dividend Period"), the Applicable Rate shall be the Initial Dividend
Rate. Commencing on the Initial Dividend Payment Date for each series of AMPS,
the Applicable Rate for each subsequent dividend period (hereinafter referred to
as a "Subsequent Dividend Period"), which Subsequent Dividend Period shall
commence on and include a Dividend Payment Date and shall end on and include the
calendar day prior to the next Dividend Payment Date (or last Dividend Payment
Date in a Dividend Period if there is more than one Dividend Payment Date),
shall be equal to the rate per annum that results from implementation of the
Auction Procedures.
The Applicable Rate for each Dividend Period commencing during a
Non-Payment Period shall be equal to the Non-Payment Period Rate; and each
Dividend Period, commencing after the first day of, and during, a Non-Payment
Period shall be a 7-Day Dividend Period in the case of each series of AMPS.
Except in the case of the willful failure of the Corporation to pay a dividend
on a Dividend Payment Date or to redeem any shares of AMPS on the date set for
such redemption, any amount of any dividend due on any Dividend Payment Date
(if, prior to the close of business on the second Business Day preceding such
Dividend Payment Date, the Corporation has declared such dividend payable on
such Dividend Payment Date to the Holders of such shares of AMPS as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date) or redemption price with respect to any shares of AMPS not paid
38
<PAGE> 39
to such Holders when due may be paid to such Holders in the same form of funds
by 12:00 noon, New York City time, on any of the first three Business Days after
such Dividend Payment Date or due date, as the case may be, provided that, such
amount is accompanied by a late charge calculated for such period of non-payment
at the Non-Payment Period Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by 365. In the case
of a willful failure of the Corporation to pay a dividend on a Dividend Payment
Date or to redeem any shares of AMPS on the date set for such redemption, the
preceding sentence shall not apply and the Applicable Rate for the Dividend
Period commencing during the Non-Payment Period resulting from such failure
shall be the Non-Payment Period Rate. For the purposes of the foregoing, payment
to a person in same-day funds on any Business Day at any time shall be
considered equivalent to payment to such person in New York Clearing House
(next-day) funds at the same time on the preceding Business Day, and any payment
made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day.
(ii) The amount of cash dividends per share of any series of AMPS
payable (if declared) on the Initial Dividend Payment Date, each 7-Day Dividend
Period and each Dividend Payment Date of each Short Term Dividend Period shall
be computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and the denominator of
which will be 365, multiplying the amount so obtained by $25,000, and rounding
the amount so obtained to the nearest cent. During any Long Term Dividend
Period, the amount of cash dividends per share of AMPS payable (if declared) on
any Dividend Payment Date shall
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be computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be such number of days in such part of
such Dividend Period that such share was outstanding and for which dividends are
payable on such Dividend Payment Date and the denominator of which will be 360,
multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent.
(iii) With respect to each Dividend Period that is a Special
Dividend Period, the Corporation may, at its sole option and to the extent
permitted by law, by telephonic and written notice (a "Request for Special
Dividend Period") to the Auction Agent and to each Broker-Dealer, request that
the next succeeding Dividend Period for a series of AMPS be a number of days
(other than seven), evenly divisible by seven, and not fewer than seven nor more
than 364 in the case of a Short Term Dividend Period or one whole year or more
but not greater than five years in the case of a Long Term Dividend Period,
specified in such notice, provided that the Corporation may not give a Request
for Special Dividend Period of greater than 28 days (and any such request shall
be null and void) unless, for any Auction occurring after the initial Auction,
Sufficient Clearing Bids were made in the last occurring Auction and unless full
cumulative dividends, any amounts due with respect to redemptions, and any
Additional Dividends payable prior to such date have been paid in full. Such
Request for Special Dividend Period, in the case of a Short Term Dividend
Period, shall be given on or prior to the second Business Day but not more than
seven Business Days prior to an Auction Date for a series of AMPS and, in the
case of a Long Term Dividend Period, shall be given on or prior to the second
Business Day but not more than 28 days prior to an Auction Date for the AMPS.
Upon receiving such Request for Special Dividend Period, the Broker-Dealer(s)
shall jointly determine whether, given the factors set forth below, it is
advisable that the Corporation issue a Notice of Special
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Dividend Period for the series of AMPS as contemplated by such Request for
Special Dividend Period and the Optional Redemption Price of the AMPS during
such Special Dividend Period and the Specific Redemption Provisions and shall
give the Corporation and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In making such determination the Broker-Dealer(s) will consider (1)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (2) existing market supply and demand for short-term and
long-term securities, (3) existing yield curves for short-term and long-term
securities comparable to the AMPS, (4) industry and financial conditions which
may affect the AMPS, (5) the investment objective of the Corporation, and (6)
the Dividend Periods and dividend rates at which current and potential
beneficial holders of the AMPS would remain or become beneficial holders. If the
Broker-Dealer(s) shall not give the Corporation and the Auction Agent a Response
by such second Business Day or if the Response states that given the factors set
forth above it is not advisable that the Corporation give a Notice of Special
Dividend Period for the series of AMPS, the Corporation may not give a Notice of
Special Dividend Period in respect of such Request for Special Dividend Period.
In the event the Response indicates that it is advisable that the Corporation
give a Notice of Special Dividend Period for the series of AMPS, the Corporation
may by no later than the second Business Day prior to such Auction Date give a
notice (a "Notice of Special Dividend Period") to the Auction Agent, the
Securities Depository and each Broker-Dealer which notice will specify (i) the
duration of the Special Dividend Period, (ii) the Optional Redemption Price as
specified in the related Response and (iii) the Specific Redemption Provisions,
if any, as specified in the related Response. The Corporation also shall provide
a copy of such Notice of Special Dividend Period to Moody's and S&P. The
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Corporation shall not give a Notice of Special Dividend Period and, if the
Corporation has given a Notice of Special Dividend Period, the Corporation is
required to give telephonic and written notice of its revocation (a "Notice of
Revocation") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the Business Day prior to the relevant Auction Date if
(x) either the 1940 Act AMPS Asset Coverage is not satisfied or the Corporation
shall fail to maintain S&P Eligible Assets and Moody's Eligible Assets each with
an aggregate Discounted Value at least equal to the AMPS Basic Maintenance
Amount, in each case on each of the two Valuation Dates immediately preceding
the Business Day prior to the relevant Auction Date on an actual basis and on a
pro forma basis giving effect to the proposed Special Dividend Period (using as
a pro forma dividend rate with respect to such Special Dividend Period the
dividend rate which the Broker-Dealers shall advise the Corporation is an
approximately equal rate for securities similar to the AMPS with an equal
dividend period), provided that, in calculating the aggregate Discounted Value
of Moody's Eligible Assets for this purpose, the Moody's Exposure Period shall
be deemed to be one week longer, (y) sufficient funds for the payment of
dividends payable on the immediately succeeding, Dividend Payment Date have not
been irrevocably deposited with the Auction Agent by the close of business on
the third Business Day preceding the related Auction Date or (z) the
Broker-Dealer(s) jointly advise the Corporation that after consideration of the
factors listed above they have concluded that it is advisable to give a Notice
of Revocation. The Corporation also shall provide a copy of such Notice of
Revocation to Moody's and S&P. If the Corporation is prohibited from giving a
Notice of Special Dividend Period as a result of any of the factors enumerated
in clause (x), (y) or (z) above or if the Corporation gives a Notice of
Revocation with respect to a Notice of Special Dividend Period for any series of
AMPS, the next succeeding Dividend Period will be a 7-Day Dividend Period. In
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addition, in the event Sufficient Clearing Bids are not made in the applicable
Auction or such Auction is not held for any reason, such next succeeding
Dividend Period will be a 7-Day Dividend Period and the Corporation may not
again give a Notice of Special Dividend Period for the AMPS (and any such
attempted notice shall be null and void) until Sufficient Clearing Bids have
been made in an Auction with respect to a 7-Day Dividend Period.
(d) (i) Holders shall not be entitled to any dividends, whether payable in
cash, property or stock, in excess of full cumulative dividends and applicable
late charges, as herein provided, on the shares of AMPS (except for Additional
Dividends as provided in paragraph 2(e) hereof and additional payments as
provided in paragraph 2(f) hereof). Except for the late charge payable pursuant
to paragraph 2(c)(1) hereof, no interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment on the shares of AMPS that
may be in arrears.
(ii) For so long as any share of AMPS is Outstanding, the
Corporation shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Stock or other
stock, if any, ranking junior to the shares of AMPS as to dividends or upon
liquidation) in respect of the Common Stock or any other stock of the
Corporation ranking junior to or on a parity with the shares of AMPS as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of the Common Stock or any other
such junior stock (except by conversion into or exchange for stock of the
Corporation ranking junior to the shares of AMPS as to dividends and upon
liquidation) or any other such Parity Stock (except by conversion into or
exchange for stock of the Corporation ranking junior to or on a parity with the
shares of AMPS as to dividends and upon liquidation),
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unless (A) immediately after such transaction, the Corporation shall have S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount and the
Corporation shall maintain the 1940 Act AMPS Asset Coverage, (B) full cumulative
dividends on shares of AMPS and shares of Other AMPS due on or prior to the date
of the transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent, (C)
any Additional Dividend required to be paid under paragraph 2(e) below on or
before the date of such declaration or payment has been paid and (D) the
Corporation has redeemed the full number of shares of AMPS required to be
redeemed by any provision for mandatory redemption contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate, (ii)
an uncertificated right (a "Right") to receive an Additional Dividend (as
defined below), and (iii) any additional amounts as set forth in paragraph 2(f)
below. Each Right shall thereafter be independent of the share or shares of AMPS
on which the dividend was paid. The Corporation shall cause to be maintained a
record of each Right received by the respective Holders. A Right may not be
transferred other than by operation of law. If the Corporation retroactively
allocates any net capital gains or other income subject to regular Federal
income taxes to shares of AMPS without having given advance notice thereof to
the Auction Agent as described in paragraph 2(f) hereof solely by reason of the
fact that such allocation is made as a result of the redemption of all or a
portion of the outstanding shares of AMPS or the liquidation of the Corporation
(the amount of such allocation referred to herein as a "Retroactive Taxable
Allocation"), the Corporation will, within 90 days (and generally within 60
days) after the end of the Corporation's fiscal year for which a Retroactive
Taxable Allocation is made, provide notice thereof to the Auction Agent and
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to each holder of a Right applicable to such shares of AMPS (initially Cede &
Co. as nominee of The Depository Trust Company) during such fiscal year at such
holder's address as the same appears or last appeared on the Stock Books of the
Corporation. The Corporation will, within 30 days after such notice is given to
the Auction Agent, pay to the Auction Agent (who will then distribute to such
holders of Rights), out of funds legally available therefor, an amount equal to
the aggregate Additional Dividend with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate amount
of Retroactive Taxable Allocations made to such holder with respect to the
fiscal year in question, would cause such holder's dividends in dollars (after
Federal and New Jersey income tax consequences) from the aggregate of both the
Retroactive Taxable Allocations and the Additional Dividend to be equal to the
dollar amount of the dividends which would have been received by such holder if
the amount of the aggregate Retroactive Taxable Allocations would have been
excludable from the gross income of such holder. Such Additional Dividend shall
be calculated (i) without consideration being given to the time value of money;
(ii) assuming that no holder of shares of AMPS is subject to the Federal
alternative minimum tax with respect to dividends received from the Corporation;
and (iii) assuming that each Retroactive Taxable Allocation would be taxable in
the hands of each holder of shares of AMPS at the greater of: (x) the maximum
combined marginal regular Federal and New Jersey individual income tax rate
applicable to ordinary income or capital gains depending on the taxable
character of the distribution (including any surtax); or (y) the maximum
combined marginal regular Federal and New Jersey corporate income tax rate
applicable to ordinary income or capital gains depending on the taxable
character
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of the distribution (taking into account in both (x) and (y) the Federal income
tax deductibility of state taxes paid or incurred but not any phase out of, or
provision limiting, personal exemptions, itemized deductions, or the benefit of
lower tax brackets and assuming the taxability of Federally tax-exempt dividends
for corporations for New Jersey state income tax purposes).
(f) Except as provided below, whenever the Corporation intends to include
any net capital gains or other income subject to regular Federal income taxes in
any dividend on shares of AMPS, the Corporation will notify the Auction Agent of
the amount to be so included at least five Business Days prior to the Auction
Date on which the Applicable Rate for such dividend is to be established. The
Corporation may also include such income in a dividend on shares of a series of
AMPS without giving advance notice thereof if it increases the dividend by an
additional amount calculated as if such income was a Retroactive Taxable
Allocation and the additional amount was an Additional Dividend, provided that
the Corporation will notify the Auction Agent of the additional amounts to be
included in such dividend at least five Business Days prior to the applicable
Dividend Payment Date.
(g) No fractional shares of AMPS shall be issued.
3. Liquidation Rights. Upon any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the Holders shall be entitled
to receive, out of the assets of the Corporation available for distribution to
shareholders, before any distribution or payment is made upon any Common Stock
or any other capital stock ranking junior in right of payment upon liquidation
to the AMPS, the sum of $25,000 per share plus accumulated but unpaid dividends
(whether or not earned or declared) thereon to the date of distribution, and
after such payment the Holders will be entitled to no other payments other than
Additional Dividends
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as provided in paragraph 2(e) hereof. If upon any liquidation, dissolution or
winding up of the Corporation, the amounts payable with respect to the AMPS and
any other Outstanding class or series of Preferred Stock of the Corporation
ranking on a parity with the AMPS as to payment upon liquidation are not paid in
full, the Holders and the holders of such other class or series will share
ratably in any such distribution of assets in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the Holders
will not be entitled to any further participation in any distribution of assets
by the Corporation except for any Additional Dividends. A consolidation, merger
or statutory share exchange of the Corporation with or into any other
corporation or entity or a sale, whether for cash, shares of stock, securities
or properties, of all or substantially all or any part of the assets of the
Corporation shall not be deemed or construed to be a liquidation, dissolution or
winding up of the Corporation.
4. Redemption. (a) Shares of AMPS shall be redeemable by the Corporation
provided below:
(i) To the extent permitted under the 1940 Act and Maryland law,
upon giving a Notice of Redemption, the Corporation at its option may redeem
shares of AMPS, in whole or in part, out of funds legally available therefor, at
the Optional Redemption Price per share, on any Dividend Payment Date; provided
that no share of AMPS may be redeemed at the option of the Corporation during
(A) the Initial Dividend Period with respect to a series of shares or (B) a
Non-Call Period to which such share is subject. In addition, holders of AMPS
which are redeemed shall be entitled to receive Additional Dividends to the
extent provided herein. The Corporation may not give a Notice of Redemption
relating to an optional redemption as described in this paragraph 4(a)(1)
unless, at the time of giving such Notice of Redemption, the
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Corporation has available Deposit Securities with maturity or tender dates not
later than the day preceding the applicable redemption date and having a value
not less than the amount due to Holders by reason of the redemption of their
shares of AMPS on such redemption date.
(ii) The Corporation shall redeem, out of funds legally available
therefor, at the Mandatory Redemption Price per share, shares of AMPS to the
extent permitted under the 1940 Act and Maryland law, on a date fixed by the
Board of Directors, if the Corporation falls to maintain S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount as provided in paragraph 7(a) or
to satisfy the 1940 Act AMPS Asset Coverage as provided in paragraph 6 and such
failure is not cured on or before the AMPS Basic Maintenance Cure Date or the
1940 Act Cure Date (herein collectively referred to as a "Cure Date"), as the
case may be. In addition, holders of AMPS so redeemed shall be entitled to
receive Additional Dividends to the extent provided herein. The number of shares
of AMPS to be redeemed shall be equal to the lesser of (i) the minimum number of
shares of AMPS the redemption of which, if deemed to have occurred immediately
prior to the opening of business on the Cure Date, together with all shares of
other Preferred Stock subject to redemption or retirement, would result in the
Corporation having S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount or satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be,
on such Cure Date (provided that, if there is no such minimum number of shares
of AMPS and shares of other Preferred Stock the redemption of which would have
such result, all shares of AMPS and shares of other Preferred Stock then
Outstanding shall be redeemed), and (ii) the maximum number of shares of AMPS,
together with all shares of other Preferred Stock subject to redemption or
retirement, that can be redeemed out
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of funds expected to be legally available therefor on such redemption date. In
determining the number of shares of AMPS required to be redeemed in accordance
with the foregoing, the Corporation shall allocate the number required to be
redeemed which would result in the Corporation having S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount or satisfaction of the 1940 Act
AMPS Asset Coverage, as the case may be, pro rata among shares of AMPS of all
series, Other AMPS and other Preferred Stock subject to redemption pursuant to
provisions similar to those contained in this paragraph 4(a)(ii); provided that,
shares of AMPS which may not be redeemed at the option of the Corporation due to
the designation of a Non-Call Period applicable to such shares (A) will be
subject to mandatory redemption only to the extent that other shares are not
available to satisfy the number of shares required to be redeemed and (B) will
be selected for redemption in an ascending order of outstanding number of days
in the Non-Call Period (with shares with the lowest number of days to be
redeemed first) and by lot in the event of shares having an equal number of days
in such Non-Call Period. The Corporation shall effect such redemption on a
Business Day which is not later than 35 days after such Cure Date, except that
if the Corporation does not have funds legally available for the redemption of
all of the required number of shares of AMPS and shares of other Preferred Stock
which are subject to mandatory redemption or the Corporation otherwise is unable
to effect such redemption on or prior to 35 days after such Cure Date, the
Corporation shall redeem those shares of AMPS which it is unable to redeem on
the earliest practicable date on which it is able to effect such redemption out
of funds legally available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no shares of
AMPS may be redeemed pursuant to paragraph 4(a)(1) of these Articles
Supplementary (i) unless all
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dividends in arrears on all remaining outstanding shares of Parity Stock shall
have been or are being contemporaneously paid or declared and set apart for
payment and (ii) if redemption thereof would result in the Corporation's failure
to maintain Moody's Eligible Assets or S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount. In
the event that less than all the outstanding shares of a series of AMPS are to
be redeemed and there is more than one Holder, the shares of that series of AMPS
to be redeemed shall be selected by lot or such other method as the Corporation
shall deem fair and equitable.
(c) Whenever shares of AMPS are to be redeemed, the Corporation, not less
than 17 nor more than 60 days prior to the date fixed for redemption, shall mail
a notice ("Notice of Redemption") by first-class mail, postage prepaid, to each
Holder of shares of AMPS to be redeemed and to the Auction Agent. The
Corporation shall cause the Notice of Redemption to also be published in the
eastern and national editions of The Wall Street Journal. The Notice of
Redemption shall set forth (i) the redemption date, (ii) the amount of the
redemption price, (iii) the aggregate number of shares of AMPS of such series to
be redeemed, (iv) the place or places where shares of AMPS of such series are to
be surrendered for payment of the redemption price, (v) a statement that
dividends on the shares to be redeemed shall cease to accumulate on such
redemption date (except that holders may be entitled to Additional Dividends)
and (vi) the provision of these Articles Supplementary pursuant to which such
shares are being redeemed. No defect in the Notice of Redemption or in the
mailing or publication thereof shall affect the validity of the redemption
proceedings, except as required by applicable law.
If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Corporation shall have deposited in trust with
the Auction Agent, or segregated in
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an account at the Corporation's custodian bank for the benefit of the Auction
Agent, Deposit Securities (with a right of substitution) having an aggregate
Discounted Value (utilizing in the case of S&P an S&P Exposure Period of 22
Business Days) equal to the redemption payment for the shares of AMPS as to
which such Notice of Redemption has been given with irrevocable instructions and
authority to pay the redemption price to the Holders of such shares, then upon
the date of such deposit or, if no such deposit is made, then upon such date
fixed for redemption (unless the Corporation shall default in making the
redemption payment), all rights of the Holders of such shares as shareholders of
the Corporation by reason of the ownership of such shares will cease and
terminate (except their right to receive the redemption price in respect thereof
and any Additional Dividends, but without interest), and such shares shall no
longer be deemed outstanding. The Corporation shall be entitled to receive, from
time to time, from the Auction Agent the interest, if any, on such Deposit
Securities deposited with it and the Holders of any shares so redeemed shall
have no claim to any of such interest. In case the Holder of any shares so
called for redemption shall not claim the redemption payment for his shares
within one year after the date of redemption, the Auction Agent shall, upon
demand, pay over to the Corporation such amount remaining on deposit and the
Auction Agent shall thereupon be relieved of all responsibility to the Holder of
such shares called for redemption and such Holder thereafter shall look only to
the Corporation for the redemption payment.
5. Voting Rights. (a) General. Except as otherwise provided in the Charter
or By-Laws, each Holder of shares of AMPS shall be entitled to one vote for each
share held on each matter submitted to a vote of shareholders of the
Corporation, and the holders of outstanding shares of Preferred Stock, including
AMPS, and of shares of Common Stock shall vote together as a single class;
provided that, at any meeting of the shareholders of the
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Corporation held for the election of directors, the holders of outstanding
shares of Preferred Stock, including AMPS, shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes of capital stock of
the Corporation, to elect two directors of the Corporation. Subject to paragraph
5(b) hereof, the holders of outstanding shares of capital stock of the
Corporation, including the holders of outstanding shares of Preferred Stock,
including AMPS, voting as a single class, shall elect the balance of the
directors.
(b) Right to Elect Majority of Board of Directors. During any period in
which any one or more of the conditions described below shall exist (such period
being referred to herein as a "Voting Period"), the number of directors
constituting the Board of Directors shall be automatically increased by the
smallest number that, when added to the two directors elected exclusively by the
holders of shares of Preferred Stock, would constitute a majority of the Board
of Directors as so increased by such smallest number; and the holders of shares
of Preferred Stock shall be entitled, voting separately as one class (to the
exclusion of the holders of all other securities and classes of capital stock of
the Corporation), to elect such smallest number of additional directors,
together with the two directors that such holders are in any event entitled to
elect. A Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding shares of AMPS equal to at least two
full years' dividends shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the Auction Agent for the payment
of such accumulated dividends; or
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(ii) if at any time holders of any other shares of Preferred Stock
are entitled to elect a majority of the directors of the Corporation under the
1940 Act.
Upon the termination of a Voting Period, the voting rights described in
this paragraph 5(b) shall cease, subject always, however, to the reverting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this paragraph 5(b).
(c) Right to Vote with Respect to Certain Other Matters. So long as any
shares of AMPS are outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the shares of Preferred Stock
Outstanding at the time, voting separately as one class: (i) authorize, create
or issue any class or series of stock ranking prior to the AMPS or any other
series of Preferred Stock with respect to payment of dividends or the
distribution of assets on liquidation, or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so as
to adversely affect any of the contract rights expressly set forth in the
Charter of holders of shares of AMPS or any other Preferred Stock. To the extent
permitted under the 1940 Act, in the event shares of more than one series of
AMPS are outstanding, the Corporation shall not approve any of the actions set
forth in clause (i) or (ii) which adversely affects the contract rights
expressly set forth in the Charter of a Holder of shares of a series of AMPS
differently than those of a Holder of shares of any other series of AMPS without
the affirmative vote of the holders of at least a majority of the shares of AMPS
of each series adversely affected and outstanding at such time (each such
adversely affected series voting separately as a class). The Corporation shall
notify Moody's and S&P ten Business Days prior to any such vote described in
clause (i) or (ii). Unless a higher percentage is provided for under the
Charter, the affirmative vote of the holders of a majority of the outstanding
shares of Preferred Stock, including AMPS, voting together as a single class,
will be required to approve
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any plan of reorganization (including bankruptcy proceedings) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act. The class vote of holders of shares of Preferred
Stock, including AMPS, described above will in each case be in addition to a
separate vote of the requisite percentage of shares of Common Stock and shares
of Preferred Stock, including AMPS, voting together as a single class necessary
to authorize the action in question.
(d) Voting Procedures.
(i) As soon as practicable after the accrual of any right of the
holders of shares of Preferred Stock to elect additional directors as described
in paragraph 5(b) above, the Corporation shall call a special meeting of such
holders and instruct the Auction Agent to mail a notice of such special meeting
to such holders, such meeting to be held not less than 10 nor more than 20 days
after the date of mailing of such notice. If the Corporation fails to send such
notice to the Auction Agent or if the Corporation does not call such a special
meeting, it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed. At any such special meeting and at each
meeting held during a Voting Period, such Holders, voting together as a class
(to the exclusion of the holders of all other securities and classes of capital
stock of the Corporation), shall be entitled to elect the number of directors
prescribed in paragraph 5(b) above. At any such meeting or adjournment thereof
in the absence of a quorum, a majority of such holders present in person or by
proxy shall have the power to adjourn the meeting without notice, other than by
an announcement at the meeting, to a date not more than 120 days after the
original record date.
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(ii) For purposes of determining any rights of the Holders to vote on
any matter or the number of shares required to constitute a quorum, whether such
right is created by these Articles Supplementary, by the other provisions of the
Charter, by statute or otherwise, a share of AMPS which is not Outstanding shall
not be counted.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of Holders and holders of other
Preferred Stock to elect directors shall continue, notwithstanding the election
at such meeting by the Holders and such other holders of the number of directors
that they are entitled to elect, and the persons so elected by the Holders and
such other holders, together with the two incumbent directors elected by the
Holders and such other holders of Preferred Stock and the remaining incumbent
directors elected by the holders of the Common Stock and Preferred Stock, shall
constitute the duly elected directors of the Corporation.
(iv) Simultaneously with the expiration of a Voting Period, the terms
of office of the additional directors elected by the Holders and holders of
other Preferred Stock pursuant to paragraph 5(b) above shall terminate, the
remaining directors shall constitute the directors of the Corporation and the
voting rights of the Holders and such other holders to elect additional
directors pursuant to paragraph 5(b) above shall cease, subject to the
provisions of the last sentence of paragraph 5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders of
shares of AMPS shall not have any rights or preferences other than those
specifically set forth herein. The Holders of shares of AMPS shall have no
preemptive rights or rights to cumulative voting. In the event that the
Corporation fails to pay any dividends on the shares of AMPS, the exclusive
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<PAGE> 56
remedy of the Holders shall be the right to vote for directors pursuant to the
provisions of this paragraph 5.
(f) Notification to S&P and Moody's. In the event a vote of Holders of
AMPS is required pursuant to the provisions of Section 13(a) of the 1940 Act,
the Corporation shall, not later than ten Business Days prior to the date on
which such vote is to be taken, notify S&P and Moody's that such vote is to be
taken and the nature of the action with respect to which such vote is to be
taken and, not later than ten Business Days after the date on which such vote is
taken, notify S&P and Moody's of the result of such vote.
6. 1940 Act AMPS Asset Coverage. The Corporation shall maintain, as of
the last Business Day of each month in which any share of AMPS is outstanding,
the 1940 Act AMPS Asset Coverage.
7. AMPS Basic Maintenance Amount. (a) The Corporation shall maintain,
on each Valuation Date, and shall verify to its satisfaction that it is
maintaining on such Valuation Date, (i) S&P Eligible Assets having an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount and
(ii) Moody's Eligible Assets having an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount. Upon any failure to maintain the
required Discounted Value, the Corporation will use its best efforts to alter
the composition of its portfolio to reattain a Discounted Value at least equal
to the AMPS Basic Maintenance Amount on or prior to the AMPS Basic Maintenance
Cure Date.
(b) On or before 5:00 p.m., New York City time, on the third Business
Day after a Valuation Date on which the Corporation falls to satisfy the AMPS
Basic Maintenance Amount, the Corporation shall complete and deliver to the
Auction Agent, and Moody's and S&P, as the
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<PAGE> 57
case may be, a complete AMPS Basic Maintenance Report as of the date of such
failure, which will be deemed to have been delivered to the Auction Agent if the
Auction Agent receives a copy or telecopy, telex or other electronic
transcription thereof and on the same day the Corporation mails to the Auction
Agent for delivery on the next Business Day the complete AMPS Basic Maintenance
Report. The Corporation will deliver an AMPS Basic Maintenance Report to the
Auction Agent and Moody's and S&P, as the case may be, on or before 5:00 p.m.,
New York City time, on the third Business Day after a Valuation Date on which
the Corporation cures its failure to maintain Moody's Eligible Assets or S&P
Eligible Assets, as the case may be, with an aggregate Discounted Value equal to
or greater than the AMPS Basic Maintenance Amount or on which the Corporation
fails to maintain Moody's Eligible Assets or S&P Eligible Assets, as the case
may be, with an aggregate Discounted Value which exceeds the AMPS Basic
Maintenance Amount by 5% or more. The Corporation will also deliver an AMPS
Basic Maintenance Report to the Auction Agent, Moody's and S&P as of each
Quarterly Valuation Date on or before the third Business Day after such date.
Additionally, on or before 5:00 p.m., New York City time, on the third Business
Day after the first day of a Special Dividend Period, the Corporation will
deliver an AMPS Basic Maintenance Report to S&P and the Auction Agent. The
Corporation shall also provide Moody's and S&P with an AMPS Basic Maintenance
Report when specifically requested by either Moody's or S&P. A failure by the
Corporation to deliver an AMPS Basic Maintenance Report under this paragraph
7(b) shall be deemed to be delivery of an AMPS Basic Maintenance Report
indicating the Discounted Value for S&P Eligible Assets and Moody's Eligible
Assets of the Corporation is less than the AMPS Basic Maintenance Amount, as of
the relevant Valuation Date.
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(c) Within ten Business Days after the date of delivery of an AMPS
Basic Maintenance Report in accordance with paragraph 7(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Auction Agent, S&P and Moody's (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other AMPS Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Corporation during the quarter ending on such Quarterly Valuation Date),
(ii) that, in such Report (and in such randomly selected Report), the
Corporation correctly determined the assets of the Corporation which constitute
S&P Eligible Assets or Moody's Eligible Assets, as the case may be, at such
Quarterly Valuation Date in accordance with these Articles Supplementary, (iii)
that, in such Report (and in such randomly selected Report), the Corporation
determined whether the Corporation had, at such Quarterly Valuation Date (and at
the Valuation Date addressed in such randomly selected Report) in accordance
with these Articles Supplementary, S&P Eligible Assets of an aggregate
Discounted Value at least equal to the AMPS Basic Maintenance Amount and Moody's
Eligible Assets of an aggregate Discounted Value at least equal to the AMPS
Basic Maintenance Amount, (iv) with respect to the S&P ratings on New Jersey
Municipal Bonds or Municipal Bonds, the issuer name, issue size and coupon rate
listed in such Report, that the Independent Accountant has requested that S&P
verify such information and the Independent Accountant shall provide a listing
in its letter of any differences, (v) with respect to the Moody's ratings on New
Jersey Municipal Bonds or Municipal Bonds, the issuer name, issue size and
coupon rate listed in such Report, that such information has been verified by
Moody's (in the event such information is not verified by Moody's, the
Independent Accountant will inquire of Moody's what such information is, and
provide a listing in its letter of any differences), (vi) with respect to the
bid or mean price (or
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<PAGE> 59
such alternative permissible factor used in calculating the Market Value)
provided by the custodian of the Corporation's assets to the Corporation for
purposes of valuing securities in the Corporation's portfolio, the Independent
Accountant has traced the price used in such Report to the bid or mean price
listed in such Report as provided to the Corporation and verified that such
information agrees (in the event such information does not agree, the
Independent Accountant will provide a listing in its letter of such differences)
and (vii) with respect to such confirmation to Moody's, that the Corporation has
satisfied the requirements of paragraph 8(b) of these Articles Supplementary
(such confirmation is herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery to the Auction
Agent, S&P and Moody's of an AMPS Basic Maintenance Report in accordance with
paragraph 7(b) above relating to any Valuation Date on which the Corporation
failed to maintain S&P Eligible Assets with an aggregate Discounted Value and
Moody's Eligible Assets with an aggregate Discounted Value equal to or greater
than the AMPS Basic Maintenance Amount, and relating to the AMPS Basic
Maintenance Cure Date with respect to such failure, the Independent Accountant
will provide to the Auction Agent, S&P and Moody's an Accountant's Confirmation
as to such AMPS Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the AMPS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets or Moody's
Eligible Assets, as the case may be, of the Corporation was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Corporation, and the Corporation shall
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accordingly amend and deliver the AMPS Basic Maintenance Report to the Auction
Agent, S&P and Moody's promptly following receipt by the Corporation of such
Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business
Day after the Date of Original Issue of the shares of AMPS, the Corporation will
complete and deliver to S&P and Moody's an AMPS Basic Maintenance Report as of
the close of business on such Date of Original Issue. Within five Business Days
of such Date of Original Issue, the Independent Accountant will confirm in
writing to S&P and Moody's (i) the mathematical accuracy of the calculations
reflected in such Report and (ii) that the aggregate Discounted Value of S&P
Eligible Assets and the aggregate Discounted Value of Moody's Eligible Assets
reflected thereon equals or exceeds the AMPS Basic Maintenance Amount reflected
thereon. Also, on or before 5:00 p.m., New York City time, on the first Business
Day after shares of Common Stock are repurchased by the Corporation, the
Corporation will complete and deliver to S&P and Moody's an AMPS Basic
Maintenance Report as of the close of business on such date that Common Stock is
repurchased.
(g) For so long as shares of AMPS are rated by Moody's, in managing the
Corporation's portfolio, the Adviser will not alter the composition of the
Corporation's portfolio if, in the reasonable belief of the Adviser, the effect
of any such alteration would be to cause the Corporation to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the AMPS Basic Maintenance Amount as of such
Valuation Date; provided, however, that in the event that, as of the immediately
preceding Valuation Date, the aggregate Discounted Value of Moody's Eligible
Assets exceeded the AMPS Basic Maintenance Amount by five percent or less, the
Adviser will not alter the composition of the Corporation's portfolio in a
manner reasonably expected to reduce the
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aggregate Discounted Value of Moody's Eligible Assets unless the Corporation
shall have confirmed that, after giving effect to such alteration, the aggregate
Discounted Value of Moody's Eligible Assets would exceed the AMPS Basic
Maintenance Amount.
8. Certain Other Restrictions and Requirements.
(a) For so long as any shares of AMPS are rated by S&P, the Corporation
will not purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions will not impair
the ratings then assigned to the shares of AMPS by S&P, except that the
Corporation may purchase or sell futures contracts based on the Bond Buyer
Municipal Bond Index (the "Municipal Index") or United States Treasury Bonds or
Notes ("Treasury Bonds") and write, purchase or sell put and call options on
such contracts (collectively, "S&P Hedging Transactions"), subject to the
following limitations:
(i) the Corporation will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions which terminate a futures
contract or option held by the Corporation by the Corporation's taking an
opposite position thereto ("Closing Transactions")), which would cause the
Corporation at the time of such transaction to own or have sold the least of (A)
more than 1,000 outstanding futures contracts based on the Municipal Index, (B)
outstanding futures contracts based on the Municipal Index exceeding in number
25% of the quotient of the Market Value of the Corporation's total assets
divided by $1,000 or (C) outstanding futures contracts based on the Municipal
Index exceeding in number 10% of the
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average number of daily traded futures contracts based on the Municipal Index in
the 30 days preceding the time of effecting such transaction as reported by The
Wall Street Journal;
(ii) the Corporation will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause the
Corporation at the time of such transaction to own or have sold the lesser of
(A) outstanding futures contracts based on Treasury Bonds exceeding in number
50% of the quotient of the Market Value of the Corporation's total assets
divided by $100,000 ($200,000 in the case of the two-year United States Treasury
Note) or (B) outstanding futures contracts based on Treasury Bonds exceeding in
number 10% of the average number of daily traded futures contracts based on
Treasury Bonds in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal;
(iii) the Corporation will engage in Closing Transactions to close out
any outstanding futures contract which the Corporation owns or has sold or any
outstanding option thereon owned by the Corporation in the event (A) the
Corporation does not have S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Corporation is required to pay Variation Margin on
the second such Valuation Date;
(iv) the Corporation will engage in a Closing Transaction to close out
any outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon unless
the Corporation holds the securities deliverable under such terms; and
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(v) when the Corporation writes a futures contract or option thereon,
it will either maintain an amount of cash, cash equivalents or high grade (rated
A or better by S&P), fixed-income securities in a segregated account with the
Corporation's custodian, so that the amount so segregated plus the amount of
Initial Margin and Variation Margin held in the account of or on behalf of the
Corporation's broker with respect to such futures contract or option equals the
Market Value of the futures contract or option, or, in the event the Corporation
writes a futures contract or option thereon which requires delivery of an
underlying security, it shall hold such underlying security in its portfolio.
For purposes of determining whether the Corporation has S&P Eligible
Assets with a Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate Discounted
Value of S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Corporation plus
(ii) 25% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on Treasury Bonds which contracts are owned
by the Corporation.
(b) For so long as any shares of AMPS are rated by Moody's, the
Corporation will not buy or sell futures contracts, write, purchase or sell call
options on futures contracts or purchase put options on futures contracts or
write call options (except covered call options) on portfolio securities unless
it receives written confirmation from Moody's that engaging in such transactions
would not impair the ratings then assigned to the shares of AMPS by Moody's,
except that the Corporation may purchase or sell exchange-traded futures
contracts based on the Municipal Index or Treasury Bonds and purchase, write or
sell exchange-traded put options on
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such futures contracts and purchase, write or sell exchange-traded call options
on such futures contracts (collectively, "Moody's Hedging Transactions"),
subject to the following limitations:
(i) the Corporation will not engage in any Moody's Hedging Transaction
based on the Municipal Index (other than Closing Transactions) which would cause
the Corporation at the time of such transaction to own or have sold (A)
outstanding futures contracts based on the Municipal Index exceeding in number
10% of the average number of daily traded futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal or (B) outstanding futures contracts
based on the Municipal Index having a Market Value exceeding 50% of the Market
Value of all Municipal Bonds constituting Moody's Eligible Assets owned by the
Corporation (other than Moody's Eligible Assets already subject to a Moody's
Hedging Transaction);
(ii) the Corporation will not engage in any Moody's Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause the
Corporation at the time of such transaction to own or have sold (A) outstanding
futures contracts based on Treasury Bonds having an aggregate Market Value
exceeding 20% of the aggregate Market Value of Moody's Eligible Assets owned by
the Corporation and rated Aa by Moody's (or, if not rated by Moody's but rated
by S&P, rated AAA by S&P) or (B) outstanding futures contracts based on Treasury
Bonds having an aggregate Market Value exceeding 40% of the aggregate Market
Value of all Municipal Bonds constituting Moody's Eligible Assets owned by the
Corporation (other than Moody's Eligible Assets already subject to a Moody's
Hedging Transaction) and rated Baa or A by Moody's (or, if not rated by Moody's
but rated by S&P, rated A or AA by S&P) (for purposes of the foregoing clauses
(i) and (ii), the Corporation shall
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be deemed to own the number of futures contracts that underlie any outstanding
options written by the Corporation);
(iii) the Corporation will engage in Closing Transactions to close out
any outstanding futures contract based on the Municipal Index if the amount of
open interest in the Municipal Index as reported by The Wall Street Journal is
less than 5,000;
(iv) the Corporation will engage in a Closing Transaction to close out
any outstanding futures contract by no later than the fifth Business Day of the
month in which such contract expires and will engage in a Closing Transaction to
close out any outstanding option on a futures contract by no later than the
first Business Day of the month in which such option expires;
(v) the Corporation will engage in Moody's Hedging Transactions only
with respect to futures contracts or options thereon having the next settlement
date or the settlement date immediately thereafter;
(vi) the Corporation will not engage in options and futures
transactions for leveraging or speculative purposes and will not write any call
options or sell any futures contracts for the purpose of hedging the anticipated
purchase of an asset prior to completion of such purchase; and
(vii) the Corporation will not enter into an option or futures
transaction unless, after giving effect thereto, the Corporation would continue
to have Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount.
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For purposes of determining whether the Corporation has Moody's
Eligible Assets with an aggregate Discounted Value that equals or exceeds the
AMPS Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets
which the Corporation is obligated to deliver or receive pursuant to an
outstanding futures contract or option shall be as follows: (i) assets subject
to call options written by the Corporation which are either exchange-traded and
"readily reversible" or which expire within 49 days after the date as of which
such valuation is made shall be valued at the lesser of (a) Discounted Value and
(b) the exercise price of the call option written by the Corporation; (ii)
assets subject to call options written by the Corporation not meeting the
requirements of clause (i) of this sentence shall have no value; (iii) assets
subject to put options written by the Corporation shall be valued at the lesser
of (A) the exercise price and (B) the Discounted Value of the subject security;
(iv) futures contracts shall be valued at the lesser of (A) settlement price and
(B) the Discounted Value of the subject security, provided that, if a contract
matures within 49 days after the date as of which such valuation is made, where
the Corporation is the seller the contract may be valued at the settlement price
and where the Corporation is the buyer the contract may be valued at the
Discounted Value of the subject securities; and (v) where delivery may be made
to the Corporation with any security of a class of securities, the Corporation
shall assume that it will take delivery of the security with the lowest
Discounted Value.
For purposes of determining whether the Corporation has Moody's
Eligible Assets with an aggregate Discounted Value that equals or exceeds the
AMPS Basic Maintenance Amount, the following amounts shall be subtracted from
the aggregate Discounted Value of the Moody's Eligible Assets held by the
Corporation: (i) 10% of the exercise price of a written call option; (ii) the
exercise price of any written put option; (iii) where the Corporation is the
seller under a
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futures contract, 10% of the settlement price of the futures contract; (iv)
where the Corporation is the purchaser under a futures contract, the settlement
price of assets purchased under such futures contract; (v) the settlement price
of the underlying futures contract if the Corporation writes put options on a
futures contract; and (vi) 105% of the Market Value of the underlying futures
contracts if the Corporation writes call options on a futures contract and does
not own the underlying contract.
(c) For so long as any shares of AMPS are rated by Moody's, the
Corporation will not enter into any contract to purchase securities for a fixed
price at a future date beyond customary settlement time (other than such
contracts that constitute Moody's Hedging Transactions that are permitted under
paragraph 8(b) of these Articles Supplementary), except that the Corporation may
enter into such contracts to purchase newly-issued securities on the date such
securities are issued ("Forward Commitments"), subject to the following
limitations:
(i) the Corporation will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income securities rated
P-1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a Market Value that equals or exceeds the amount of the
Corporation's obligations under any Forward Commitments to which it is from time
to time a party or long-term fixed income securities with a Discounted Value
that equals or exceeds the amount of the Corporation's obligations under any
Forward Commitment to which it is from time to time a party; and
(ii) the Corporation will not enter into a Forward Commitment unless,
after giving effect thereto, the Corporation would continue to have Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount.
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For purposes of determining whether the Corporation has Moody's
Eligible Assets with an aggregate Discounted Value that equals or exceeds the
AMPS Basic Maintenance Amount, the Discounted Value of all Forward Commitments
to which the Corporation is a party and of all securities deliverable to the
Corporation pursuant to such Forward Commitments shall be zero.
(d) For so long as AMPS are rated by S&P or Moody's, the Corporation
will not, unless it has received written confirmation from S&P and/or Moody's,
as the case may be, that such action would not impair the ratings then assigned
to AMPS by S&P and/or Moody's, as the case may be, (i) borrow money except for
the purpose of clearing transactions in portfolio securities (which borrowings
shall under any circumstances be limited to the lesser of $10 million and an
amount equal to 5% of the Market Value of the Corporation's assets at the time
of such borrowings and which borrowings shall be repaid within 60 days and not
be extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets and S&P Eligible Assets to be less than the AMPS Basic
Maintenance Amount), (ii) engage in short sales of securities, (iii) lend any
securities, (iv) issue any class or series of shares ranking prior to or on a
parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
Corporation, (v) reissue any AMPS previously purchased or redeemed by the
Corporation, (vi) merge or consolidate into or with any other corporation or
entity, (vii) change the Pricing Service or (viii) engage in reverse repurchase
agreements.
(e) For so long as AMPS are rated by Moody's, the Corporation agrees to
provide Moody's with the following, unless the Corporation has received written
confirmation from Moody's that the provision of such information is no longer
required and that the current rating then assigned to the AMPS by Moody's would
not be impaired: a notification letter at
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least 30 days prior to any material change in the Articles; a copy of the AMPS
Basic Maintenance Report prepared by the Corporation in accordance with this
Articles Supplementary; and a notice upon the occurrence of any of the following
events: (i) any failure by the Corporation to declare or pay any dividends on
the AMPS or successfully remarket the AMPS; (ii) any mandatory or optional
redemption of the AMPS effected by the Corporation; (iii) any assumption of
control of the Board of Directors of the Corporation by the holders of the AMPS;
(iv) a general unavailability of dealer quotes on the assets of the Corporation;
(v) any material auditor discrepancies on valuations; (vi) the dividend rate on
the AMPS equals or exceeds 95% of the Aaa Composite Commercial Paper Rate; (vii)
the occurrence of any Special Dividend Period; (viii) any change in the Maximum
Applicable Rate or the Reference Rate; (ix) the acquisition by any person of
beneficial ownership of more than 5% of the Corporation's voting stocks
(inclusive of Common Stocks and Preferred Stocks); (x) the occurrence of any
change in Internal Revenue Service rules with respect to the payment of
Additional Dividends; (xi) any change in the Pricing Service employed by the
Corporation; (xii) any change in the Investment Adviser; (xiii) any increase of
greater than 40% to the maximum marginal Federal income tax rate applicable to
individuals or corporations; and (xiv) the maximum marginal Federal income tax
rate applicable to individuals or corporations is increased to a rate in excess
of 50%.
9. Notice. All notices or communications, unless otherwise specified in
the By-Laws of the Corporation or these Articles Supplementary, shall be
sufficiently given if in writing and delivered in person or mailed by
first-class mail, postage prepaid. Notice shall be deemed given on the earlier
of the date received or the date seven days after which such notice is mailed.
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10. Auction Procedures. (a) Certain definitions. As used in this
paragraph 10, the following terms shall have the following meanings, unless the
context otherwise requires:
(i) "AMPS" means the shares of AMPS being auctioned pursuant to this
paragraph 10.
(ii) "Auction Date" means the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available AMPS" has the meaning specified in paragraph
10(d)(1) below.
(iv) "Bid" has the meaning specified in paragraph 10(b)(i) below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i) below.
(vi) "Hold Order" has the meaning specified in paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both shall
not make such rating available, the equivalent of either or both of such ratings
by a Substitute Rating Agency or two Substitute Rating Agencies or, in the event
that only one such rating shall be available, such rating) and
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(ii) whether the Corporation has provided notification to the Auction Agent
prior to the Auction establishing the Applicable Rate for any dividend pursuant
to paragraph 2(f) hereof that net capital gains or other taxable income will be
included in such dividend on shares of AMPS as follows:
<TABLE>
<CAPTION>
Credit Ratings Applicable Percentage Applicable Percentage
of Reference Rate - of Reference Rate -
Moody's S&P No Notification Notification
------- --- --------------- ------------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
The Corporation shall take all reasonable action necessary to enable
S&P and Moody's to provide a rating for each series of the AMPS. If either S&P
or Moody's shall not make such a rating available, or neither S&P nor Moody's
shall make such a rating available, Merrill Lynch, Pierce, Fenner & Smith
Incorporated or its affiliates and successors, after consultation with the
Corporation, shall select a nationally recognized statistical rating
organization or two nationally recognized statistical rating organizations to
act as a Substitute Rating Agency or Substitute Rating Agencies, as the case may
be.
(viii) "Order" has the meaning specified in paragraph 10(b)(i)
below.
(ix) "Sell Order" has the meaning specified in paragraph 10(b)(i)
below.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on
any Auction Date or such other time on any Auction Date as may be specified by
the Auction Agent
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from time to time as the time by which each Broker-Dealer must submit to the
Auction Agent in writing all Orders obtained by it for the Auction to be
conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in paragraph 10(d)(i)
below.
(xii) "Submitted Hold Order" has the meaning specified in paragraph
10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in
paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in paragraph 1
0(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders.
(i) Unless otherwise permitted by the Corporation, Beneficial
Owners and Potential Beneficial Owners may only participate in Auctions through
their Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to
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them by Beneficial Owners and as Potential Holders in respect of shares subject
to Orders submitted to them by Potential Beneficial Owners. A Broker-Dealer may
also hold shares of AMPS in its own account as a Beneficial Owner. A
Broker-Dealer may thus submit Orders to the Auction Agent as a Beneficial Owner
or a Potential Beneficial Owner and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of both itself and its customers.
On or prior to the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer
information as to:
(1) the number of Outstanding shares, if any, of AMPS
held by such Beneficial Owner which such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for the next
succeeding Dividend Period;
(2) the number of Outstanding shares, if any, of AMPS
held by such Beneficial Owner which such Beneficial Owner desires to
continue to hold, provided that the Applicable Rate for the next
succeeding Dividend Period shall not be less than the rate per annum
specified by such Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of AMPS
held by such Beneficial Owner which such Beneficial Owner offers to
sell without regard to the Applicable Rate for the next succeeding
Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners
that shall be maintained in good faith for the purpose of conducting
a competitive Auction, shall contact Potential Beneficial Owners,
including Persons that are not Beneficial Owners, on such list to
determine the number of Outstanding shares, if any, of AMPS which
each such Potential Beneficial Owner offers to purchase,
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<PAGE> 74
provided that the Applicable Rate for the next succeeding Dividend
Period shall not be less than the rate per annum specified by such
Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this paragraph 10(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account, is hereinafter referred to as a "Bidder"; an Order
containing the information referred to in clause (A)(1) of this paragraph
10(b)(i) is hereinafter referred to as a "Hold Order"; an Order containing the
information referred to in clause (A)(2) or (B) of this paragraph 10(b)(i) is
hereinafter referred to as a "Bid"; and an Order containing the information
referred to in clause (A)(3) of this paragraph 10(b)(i) is hereinafter referred
to as a "Sell Order". Inasmuch as a Broker-Dealer participates in an Auction as
an Existing Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its customers or
itself, all discussion herein relating to the consequences of an Auction for
Existing Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding shares of AMPS specified in such
Bid if the Applicable Rate determined on such Auction Date shall be
less than the rate per annum specified in such Bid; or
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<PAGE> 75
(2) such number or a lesser number of Outstanding shares of
AMPS to be determined as set forth in paragraph 10(e)(i)(D) if the
Applicable Rate determined on such Auction Date shall be equal to the
rate per annum specified therein; or
(3) a lesser number of Outstanding shares of AMPS to be
determined as set forth in paragraph 10(e)(ii)(C) if such specified
rate per annum shall be higher than the Maximum Applicable Rate and
Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding shares of AMPS specified in such
Sell Order; or
(2) such number or a lesser number of Outstanding shares of
AMPS to be determined as set forth in paragraph 10(e)(ii)(C) if
Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer
to purchase:
(1) the number of Outstanding shares of AMPS specified in such
Bid if the Applicable Rate determined on such Auction Date shall be
higher than the rate per annum specified in such Bid; or
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<PAGE> 76
(2) such number or a lesser number of Outstanding shares of
AMPS to be determined as set forth in paragraph 10(e)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to the
rate per annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through the
Auction Agent's Auction Processing System to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the
Corporation) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Corporation);
(B) the aggregate number of Outstanding shares of AMPS that are the
subject of such Order;
(C) the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of AMPS subject
to any Hold Order placed by such Existing Holder;
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<PAGE> 77
(2) the number of Outstanding shares, if any, of AMPS subject
to any Bid placed by such Existing Holder and the rate per annum
specified in such Bid; and
(3) the number of Outstanding shares, if any, of AMPS subject
to any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum
specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more
than three figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding
shares of AMPS held by an Existing Holder are not submitted to the Auction Agent
prior to the Submission Deadline, the Auction Agent shall deem a Hold Order (in
the case of an Auction relating to a Dividend Period which is not a Special
Dividend Period) and a Sell Order (in the case of an Auction relating to a
Special Dividend Period) to have been submitted on behalf of such Existing
Holder covering the number of Outstanding shares of AMPS held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder
covering in the aggregate more than the number of Outstanding shares of AMPS
held by such Existing Holder are submitted to the Auction Agent, such Order
shall be considered valid as follows and in the following order of priority:
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<PAGE> 78
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of Outstanding shares
of AMPS held by such Existing Holder; provided that if more than one
Hold Order is submitted on behalf of such Existing Holder and the
number of shares of AMPS subject to such Hold Orders exceeds the number
of Outstanding shares of AMPS held by such Existing Holder, the number
of shares of AMPS subject to each of such Hold Orders shall be reduced
pro rata so that such Hold Orders, in the aggregate, will cover exactly
the number of Outstanding shares of AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing
Holder, up to and including the excess of the number of Outstanding
shares of AMPS held by such Existing, Holder over the number of shares
of AMPS subject to any Hold Order referred to in paragraph 10(c)(iv)(A)
above (and if more than one Bid submitted on behalf of such Existing
Holder specifies the same rate per annum and together they cover more
than the remaining number of shares that can be the subject of valid
Bids after application of paragraph 10(c)(iv)(A) above and of the
foregoing portion of this paragraph 10(c)(iv)(B) to any Bid or Bids
specifying a lower rate or rates per annum, the number of shares
subject to each of such Bids shall be reduced pro rata so that such
Bids, in the aggregate, cover exactly such remaining number of shares);
and the number of shares, if any, subject to Bids not valid under this
78
<PAGE> 79
paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding shares of AMPS held by such
Existing Holder over the number of shares of AMPS subject to Hold
Orders referred to in paragraph 10(c)(iv)(A) and Bids referred to in
paragraph 10(c)(iv)(B); provided that if more than one Sell Order is
submitted on behalf of any Existing Holder and the number of shares of
AMPS subject to such Sell Orders is greater than such excess, the
number of shares of AMPS subject to each of such Sell Orders shall be
reduced pro rata so that such Sell Orders, in the aggregate, cover
exactly the number of shares of AMPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any
Potential Holder, each Bid submitted shall be a separate Bid with the rate per
annum and number of shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date shall be
irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction
Date, the Auction Agent shall assemble all Orders submitted or deemed submitted
to it by the
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<PAGE> 80
Broker-Dealers (each such Order as submitted or deemed submitted by
a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding shares of AMPS over
the number of Outstanding shares of AMPS that are the subject of
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available AMPS");
(B) from the Submitted Orders whether the number of Outstanding shares
of AMPS that are the subject of Submitted Bids by Potential Holders
specifying one or more rates per annum equal to or lower than the
Maximum Applicable Rate exceeds or is equal to the sum of:
(1) the number of Outstanding shares of AMPS that are the
subject of Submitted Bids by Existing Holders specifying one or more
rates per annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding shares of AMPS that are subject
to Submitted Sell Orders (if such excess or such equality exists (other
than because the number of Outstanding shares of AMPS in clause (1)
above and this clause (2) are each zero because all of the Outstanding
shares of AMPS are the subject of Submitted Hold Orders), such
Submitted Bids by Potential Holders being hereinafter referred to
collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
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<PAGE> 81
(1) each Submitted Bid from Existing Holders specifying the
Winning Bid Rate and all other Submitted Bids from Existing Holders
specifying lower rates per annum were rejected, thus entitling such
Existing Holders to continue to hold the shares of AMPS that are the
subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders
specifying lower rates per annum were accepted, thus entitling the
Potential Holders to purchase the shares of AMPS that are the subject
of such Submitted Bids, would result in the number of shares subject to
all Submitted Bids specifying the Winning Bid Rate or a lower rate per
annum being at least equal to the Available AMPS.
(ii) Promptly after the Auction Agent has made the
determinations pursuant to paragraph 10(d)(i), the Auction Agent shall advise
the Corporation of the Maximum Applicable Rate and, based on such
determinations, the Applicable Rate for the next succeeding Dividend Period as
follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of
the Outstanding shares of AMPS are the subject of Submitted Hold
Orders), that the Applicable Rate for the next succeeding Dividend
Period shall be equal to the Maximum Applicable Rate; or
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<PAGE> 82
(C) if all of the Outstanding shares of AMPS are the subject of
Submitted Hold Orders, that the Dividend Period next succeeding the
Auction shall automatically be the same length as the immediately
preceding Dividend Period and the Applicable Rate for the next
succeeding Dividend Period shall be equal to 40% of the Reference Rate
(or 60% of such rate if the Corporation has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate
for any dividend pursuant to paragraph 2(f) hereof that net capital
gains or other taxable income will be included in such dividend on
shares of AMPS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares. Based on the determinations made pursuant to
paragraph 10(d)(i), the Submitted Bids and Submitted Sell Orders shall be
accepted or rejected and the Auction Agent shall take such other action as set
forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order of
priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted and
the Submitted Bid of each of the Existing Holders specifying any rate
per annum that is higher than the Winning Bid Rate shall be accepted,
thus requiring each such Existing Holder to sell the Outstanding shares
of AMPS that are the subject of such Submitted Sell Order or Submitted
Bid;
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<PAGE> 83
(B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be
rejected, thus entitling each such Existing Holder to continue to hold
the Outstanding shares of AMPS that are the subject of such Submitted
Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be
accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the Outstanding
shares of AMPS that are the subject of such Submitted Bid, unless the
number of Outstanding shares of AMPS subject to all such Submitted Bids
shall be greater than the number of Outstanding shares of AMPS
("Remaining Shares") equal to the excess of the Available AMPS over the
number of Outstanding shares of AMPS subject to Submitted Bids
described in paragraph 10(c)(i)(B) and paragraph 10(e)(i)(C), in which
event the Submitted Bids of each such Existing Holder shall be
accepted, and each such Existing Holder shall be required to sell
Outstanding shares of AMPS, but only in an amount equal to the
difference between (1) the number of Outstanding shares of AMPS then
held by such Existing Holder subject to such Submitted Bid and (2) the
number of shares of AMPS obtained by multiplying (x) the number of
Remaining Shares by (y) a fraction the numerator of which shall be the
number of Outstanding shares of AMPS held by such Existing Holder
subject to such Submitted Bid and the denominator of which shall be the
sum of the number of Outstanding shares of AMPS subject to such
Submitted Bids made by
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<PAGE> 84
all such Existing Holders that specified a rate per annum equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted
but only in an amount equal to the number of Outstanding shares of AMPS
obtained by multiplying (x) the difference between the Available AMPS
and the number of Outstanding shares of AMPS subject to Submitted Bids
described in paragraph 10(e)(i)(B), paragraph 10(e)(i)(C) and paragraph
10(e)(i)(D) by (y) a fraction the numerator of which shall be the
number of Outstanding shares of AMPS subject to such Submitted Bid and
the denominator of which shall be the sum of the number of Outstanding
shares of AMPS subject to such Submitted Bids made by all such
Potential Holders that specified rates per annum equal to the Winning
Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other
than because all of the Outstanding shares of AMPS are subject to Submitted Hold
Orders), subject to the provisions of paragraph 10(e)(iii), Submitted Orders
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall
be rejected, thus entitling such Existing Holder to continue to hold
the Outstanding shares of AMPS that are the subject of such Submitted
Bid;
84
<PAGE> 85
(B) the Submitted Bid of each Potential Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall
be accepted, thus requiring such Potential Holder to purchase the
Outstanding shares of AMPS that are the subject of such Submitted Bid;
and
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted
and the Submitted Sell Orders of each Existing Holder shall be
accepted, in both cases only in an amount equal to the difference
between (1) the number of Outstanding shares of AMPS then held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order
and (2) the number of shares of AMPS obtained by multiplying (x) the
difference between the Available AMPS and the aggregate number of
Outstanding shares of AMPS subject to Submitted Bids described in
paragraph 10(e)(ii)(A) and paragraph 10(e)(ii)(B) by (y) a fraction the
numerator of which shall be the number of Outstanding shares of AMPS
held by such Existing Holder subject to such Submitted Bid or Submitted
Sell Order and the denominator of which shall be the number of
Outstanding shares of AMPS subject to all such Submitted Bids and
Submitted Sell Orders.
(iii) If, as a result of the procedures described in paragraph
10(e)(i) or paragraph 10(e)(ii), any Existing Holder would be entitled or
required to sell, or any Potential Holder would be entitled or required to
purchase, a fraction of a share of AMPS on any Auction Date, the Auction Agent
shall, in such manner as in its sole discretion it shall determine, round up or
down the number of shares of AMPS to be purchased or sold by any Existing Holder
or Potential Holder on such Auction Date so that each Outstanding share of AMPS
purchased or
85
<PAGE> 86
sold by each Existing Holder or Potential Holder on such Auction Date shall be a
whole share of AMPS.
(iv) If, as a result of the procedures described in paragraph
10(e)(i), any Potential Holder would be entitled or required to purchase less
than a whole share of AMPS on any Auction Date, the Auction Agent shall, in such
manner as in its sole discretion it shall determine, allocate shares of AMPS for
purchase among Potential Holders so that only whole shares of AMPS are purchased
on such Auction Date by any Potential Holder, even if such allocation results in
one or more of such Potential Holders not purchasing any shares of AMPS on such
Auction Date.
(v) Based on the results of each Auction, the Auction Agent
shall determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate number
of Outstanding shares of AMPS to be purchased and the aggregate number of the
Outstanding shares of AMPS to be sold by such Potential Holders and Existing
Holders and, to the extent that such aggregate number of Outstanding shares to
be purchased and such aggregate number of Outstanding shares to be sold differ,
the Auction Agent shall determine to which other Broker-Dealer or Broker-Dealers
acting for one or more purchasers such Broker-Dealer shall deliver, or from
which other Broker-Dealer or Broker-Dealers acting for one or more sellers such
Broker-Dealer shall receive, as the case may be, Outstanding shares of AMPS.
(f) Miscellaneous. The Corporation may interpret the provisions of this
paragraph 10 to resolve any inconsistency or ambiguity, remedy any formal defect
or make any other change or modification that does not substantially adversely
affect the rights of Beneficial Owners of
86
<PAGE> 87
AMPS. A Beneficial Owner or an Existing Holder (A) may sell, transfer or
otherwise dispose of shares of AMPS only pursuant to a Bid or Sell Order in
accordance with the procedures described in this paragraph 10 or to or through a
Broker-Dealer, provided that in the case of all transfers other than pursuant to
Auctions such Beneficial Owner or Existing Holder, its Broker-Dealer, if
applicable, or its Agent Member advises the Auction Agent of such transfer and
(B) except as otherwise required by law, shall have the ownership of the shares
of AMPS held by it maintained in book entry form by the Securities Depository in
the account of its Agent Member, which in turn will maintain records of such
Beneficial Owner's beneficial ownership. Neither the Corporation nor any
Affiliate shall submit an Order in any Auction. Any Beneficial Owner that is an
Affiliate shall not sell, transfer or otherwise dispose of shares of AMPS to any
Person other than the Corporation. All of the Outstanding shares of AMPS of a
series shall be represented by a single certificate registered in the name of
the nominee of the Securities Depository unless otherwise required by law or
unless there is no Securities Depository. If there is no Securities Depository,
at the Corporation's option and upon its receipt of such documents as it deems
appropriate, any shares of AMPS may be registered in the Stock Register in the
name of the Beneficial Owner thereof and such Beneficial Owner thereupon will be
entitled to receive certificates therefor and required to deliver certificates
therefor upon transfer or exchange thereof
11. Securities Depository; Stock Certificates. (a) If there is a
Securities Depository, one certificate for all of the shares of AMPS of each
series shall be issued to the Securities Depository and registered in the name
of the Securities Depository or its nominee. Additional certificates may be
issued as necessary to represent shares of AMPS. All such certificates shall
bear a legend to the effect that such certificates are issued subject to the
provisions restricting the transfer of shares of AMPS contained in these
Articles Supplementary. Unless the Corporation
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<PAGE> 88
shall have elected, during a Non-Payment Period, to waive this requirement, the
Corporation will also issue stop-transfer instructions to the Auction Agent for
the shares of AMPS. Except as provided in paragraph (b) below, the Securities
Depository or its nominee will be the Holder, and no Beneficial Owner shall
receive certificates representing its ownership interest in such shares.
(b) If the Applicable Rate applicable to all shares of AMPS of a series
shall be the Non-Payment Period Rate or there is no Securities Depository, the
Corporation may at its option issue one or more new certificates with respect to
such shares (without the legend referred to in paragraph 11(a)) registered in
the names of the Beneficial Owners or their nominees and rescind the
stop-transfer instructions referred to in paragraph 11(a) with respect to such
shares.
88
<PAGE> 89
IN WITNESS WHEREOF, MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC. has
caused these presents to be signed in its name and on its behalf by a duly
authorized officer, and attested by its Secretary, and the said officers of the
Corporation further acknowledge said instrument to be the corporate act of the
Corporation, and state under penalties of perjury that to the best of their
knowledge, information and belief the matters and facts herein set forth with
respect to approval are true in all material respects, all on
_____________,1999.
MUNIHOLDINGS NEW JERSEY INSURED
FUND IV, INC.
By ________________________________
Vice President
Attest:
______________________________
William E. Zitelli, Jr.
Secretary
89
<PAGE> 1
Auction Market Preferred Stock, Series A
NUMBER 1 SHARES
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF MARYLAND CERTAIN DEFINITIONS
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY CUSIP # 62625Q 305
THIS CERTIFIES THAT
CEDE & CO.
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF AUCTION MARKET PREFERRED STOCK, PAR
VALUE $.10 PER SHARE, LIQUIDATION PREFERENCE $25,000 PER SHARE PLUS AN AMOUNT
EQUAL TO ACCUMULATED BUT UNPAID DIVIDENDS THEREON (WHETHER OR NOT EARNED OR
DECLARED) OF
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
TRANSFERABLE ON THE BOOKS OF SAID CORPORATION IN PERSON OR BY DULY AUTHORIZED
ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT AND
REGISTERED BY THE REGISTRAR.
IN WITNESS WHEREOF, MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC. HAS CAUSED ITS
CORPORATE SEAL TO BE HERETO AFFIXED AND THIS CERTIFICATE TO BE EXECUTED IN ITS
NAME AND BEHALF BY ITS DULY AUTHORIZED OFFICERS.
Dated: , 1999
Countersigned and Registered:
IBJ WHITEHALL BANK & TRUST COMPANY ____________________________
(New York) Transfer Agent
By: ___________________________________ ____________________________
Authorized Signature
<PAGE> 2
THE TRANSFER OF THE SHARES OF AUCTION MARKET PREFERRED STOCK REPRESENTED HEREBY
IS SUBJECT TO THE RESTRICTIONS CONTAINED IN THE CORPORATION'S CHARTER. THE
CORPORATION WILL FURNISH INFORMATION ABOUT SUCH RESTRICTIONS TO ANY STOCKHOLDER,
WITHOUT CHARGE, UPON REQUEST TO THE SECRETARY OF THE CORPORATION.
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
A full statement of the designations and any preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of each
class and series of stock which the Corporation is authorized to issue and the
differences in the relative rights and preferences between the shares of each
class and series to the extent that they have been set, and the authority of the
Board of Directors to set the relative rights and preferences of subsequent
classes and series, will be furnished by the Corporation to any stockholder,
without charge, upon request to the Secretary of the Corporation at its
principal office.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--______ Custodian ______
TEN ENT--as tenants by the entireties (Cust) (Minor)
JT TEN-- as joint tenants with right under Uniform Gifts to Minors Act ________
of survivorship and not as (State)
tenants in common
Additional abbreviations also may be used though not in the above list.
For value received, _____________________ hereby sell, assign and transfer unto
Please insert social securities or other identifying number of assignee
___________________________________________
___________________________________________
________________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _________________________________ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated:________________________
___________________________________________
NOTICE: The Signature to this assignment must
correspond with the name as written upon the
face of the Certificate in every particular,
without alteration or enlargement or any
change whatsoever.
<PAGE> 3
Auction Market Preferred Stock, Series B
NUMBER 1 SHARES
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF MARYLAND CERTAIN DEFINITIONS
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY CUSIP # 62625Q 305
THIS CERTIFIES THAT
CEDE & CO.
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF AUCTION MARKET PREFERRED STOCK, PAR
VALUE $.10 PER SHARE, LIQUIDATION PREFERENCE $25,000 PER SHARE PLUS AN AMOUNT
EQUAL TO ACCUMULATED BUT UNPAID DIVIDENDS THEREON (WHETHER OR NOT EARNED OR
DECLARED) OF
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
TRANSFERABLE ON THE BOOKS OF SAID CORPORATION IN PERSON OR BY DULY AUTHORIZED
ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT AND
REGISTERED BY THE REGISTRAR.
IN WITNESS WHEREOF, MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC. HAS CAUSED ITS
CORPORATE SEAL TO BE HERETO AFFIXED AND THIS CERTIFICATE TO BE EXECUTED IN ITS
NAME AND BEHALF BY ITS DULY AUTHORIZED OFFICERS.
Dated: , 1999
Countersigned and Registered:
IBJ WHITEHALL BANK & TRUST COMPANY ____________________________
(New York) Transfer Agent
By: ___________________________________ ____________________________
Authorized Signature
<PAGE> 4
THE TRANSFER OF THE SHARES OF AUCTION MARKET PREFERRED STOCK REPRESENTED HEREBY
IS SUBJECT TO THE RESTRICTIONS CONTAINED IN THE CORPORATION'S CHARTER. THE
CORPORATION WILL FURNISH INFORMATION ABOUT SUCH RESTRICTIONS TO ANY STOCKHOLDER,
WITHOUT CHARGE, UPON REQUEST TO THE SECRETARY OF THE CORPORATION.
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
A full statement of the designations and any preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of each
class and series of stock which the Corporation is authorized to issue and the
differences in the relative rights and preferences between the shares of each
class and series to the extent that they have been set, and the authority of the
Board of Directors to set the relative rights and preferences of subsequent
classes and series, will be furnished by the Corporation to any stockholder,
without charge, upon request to the Secretary of the Corporation at its
principal office.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--______ Custodian ______
TEN ENT--as tenants by the entireties (Cust) (Minor)
JT TEN-- as joint tenants with right under Uniform Gifts to Minors Act ________
of survivorship and not as (State)
tenants in common
Additional abbreviations also may be used though not in the above list.
For value received, _____________________ hereby sell, assign and transfer unto
Please insert social securities or other identifying number of assignee
___________________________________________
___________________________________________
________________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _________________________________ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated:________________________
___________________________________________
NOTICE: The Signature to this assignment must
correspond with the name as written upon the
face of the Certificate in every particular,
without alteration or enlargement or any
change whatsoever.
<PAGE> 1
EXHIBIT (h)(1)
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
(A MARYLAND CORPORATION)
$________________
AUCTION MARKET PREFERRED STOCK
_______ SHARES, SERIES A
_______ SHARES, SERIES B
PURCHASE AGREEMENT
Dated: ________ __, 1999
<PAGE> 2
TABLE OF CONTENTS
PAGE
----
SECTION 1. Representations and Warranties................................... 3
(a) Representations and Warranties by the Fund and the Adviser 3
(b) Additional Representations of the Adviser................. 7
(c) Officers' Certificates.................................... 8
SECTION 2. Sale and Delivery to the Underwriter; Closing.................... 8
(a) Purchase Price............................................ 8
(b) Payment................................................... 8
(c) Denominations; Registration............................... 8
SECTION 3. Covenants of the Fund............................................ 9
(a) Compliance with Securities Regulations and Commission
Requests.................................................. 9
(b) Filing of Amendments...................................... 9
(c) Delivery of Registration Statements....................... 9
(d) Delivery of Prospectus.................................... 10
(e) Continued Compliance with Securities Laws................. 10
(f) Blue Sky Qualifications................................... 10
(g) Rule 158.................................................. 10
(h) Use of Proceeds........................................... 11
(i) Subchapter M.............................................. 11
(j) Restrictions on Sale of Shares............................ 11
SECTION 4. Covenants of the Underwriter..................................... 11
SECTION 5. Payment of Expenses.............................................. 11
(a) Expenses.................................................. 11
(b) Termination of Agreement.................................. 12
SECTION 6. Conditions of Underwriter's Obligations.......................... 12
(a) Effectiveness of Registration Statement................... 12
(b) Opinion of Counsel for the Fund and the Underwriter....... 12
(c) Opinion of General Counsel of the Adviser................. 12
(d) Officers' Certificates.................................... 12
(e) Accountant's Comfort Letter............................... 13
(f) Bring-down Comfort Letter................................. 13
(g) Ratings Letters........................................... 13
(h) Additional Documents...................................... 13
(i) Termination of Agreement.................................. 13
(i)
<PAGE> 3
<TABLE>
<S> <C>
SECTION 7. Indemnification.................................................. 14
(a) Indemnification of the Underwriter........................ 14
(b) Indemnification of Fund, Adviser and Directors and Officers 15
(c) Actions against Parties, Notification..................... 15
(d) Settlement without Consent if Failure to Reimburse........ 15
SECTION 8. Contribution..................................................... 16
SECTION 9. Representations, Warranties and Agreements to Survive Delivery... 17
SECTION 10. Termination of Agreement........................................ 17
(a) Termination; General...................................... 17
(b) Liabilities............................................... 17
SECTION 11. Notices......................................................... 18
SECTION 12. Parties......................................................... 18
SECTION 13. Governing Law and Time.......................................... 18
SECTION 14. Effect of Headings.............................................. 18
SCHEDULE A. . .............................................................. 20
EXHIBITS
Exhibit A -................................Form of Opinion of Fund's Counsel A-1
Exhibit B -.....Form of Opinion of General Counsel to the Investment Adviser B-1
Exhibit C -..............................Form of Accountants' Comfort Letter C-1
</TABLE>
(ii)
<PAGE> 4
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
(a Maryland corporation)
$________________
Auction Market Preferred Stock
_______ Shares, Series A
_______ Shares, Series B
(Liquidation Preference $25,000 Per Share)
PURCHASE AGREEMENT
, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1201
Ladies and Gentlemen:
MuniHoldings New Jersey Insured Fund IV, Inc., a Maryland corporation (the
"Fund"), and Fund Asset Management, L.P., a Delaware limited partnership (the
"Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"), with respect to the
issue and sale by the Fund and the purchase by the Underwriter of _____ shares
of Auction Market Preferred Stock(R), Series A ("Series A AMPS") and _____
shares of Auction Market Preferred Stock , Series B ("Series B AMPS"), each with
a par value of $.10 per share and a liquidation preference $25,000 per share
plus an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared), of the Fund (together, the "Shares").
* Registered trademark of Merrill Lynch & Co., Inc.
<PAGE> 5
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems advisable after this
Agreement has been executed and delivered.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and a registration statement on Form N-2 (No.
333-77537), including the related preliminary prospectus and preliminary
statement of additional information, for the registration of the Shares under
the Securities Act of 1933, as amended (the "1933 Act"), the Investment Company
Act, and the rules and regulations of the Commission under the 1933 Act and the
Investment Company Act (together, the "Rules and Regulations"), and has filed
such amendments to such registration statement on Form N-2, if any, and such
amended preliminary prospectuses and preliminary statements of additional
information as may have been required to the date hereof. Promptly after
execution and delivery of this Agreement, the Fund will either (i) prepare and
file a prospectus and statement of additional information in accordance with the
provisions of paragraph (c) of Rule 497 ("Rule 497(c)") of the rules and
regulations of the Commission under the 1933 Act (the "1933 Act Regulations") or
a certificate in accordance with the provisions of paragraph (j) of Rule 497
("Rule 497(j)") of the 1933 Act Regulations, (ii) prepare and file a prospectus
and statement of additional information in accordance with the provisions of
Rule 430A ("Rule 430A") of the 1933 Act Regulations and paragraph (h) of Rule
497 ("Rule 497(h)") of the 1933 Act Regulations, or (iii) if the Fund has
elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare
and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule
434 and Rule 497(h). The information included in any such prospectus and
statement of additional information or in any such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus and statement of
additional information used before such registration statement became effective,
and any prospectus and statement of additional information that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus/statement." Such
registration statement, including the exhibits thereto and schedules thereto, if
any, at the time it became effective and including the Rule 430A Information and
the Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933
Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final prospectus and final
statement of additional information in the form first furnished to the
Underwriter for use in connection with the offering of the Shares is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus/statement dated May 18, 1999, together with
the applicable Term Sheet and all references in this Agreement to the date of
such Prospectus shall mean the date of the applicable Term Sheet. For purposes
of this Agreement, all references to the Registration Statement, any preliminary
prospectus/statement, the Prospectus, or any Term Sheet or any amendment or
supplement to any of the foregoing shall be deemed to include the
2
<PAGE> 6
copy filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules and
other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus/statement, or the Prospectus
(or other references of like import) shall be deemed to mean and include all
such financial statements and schedules and other information which is
incorporated by reference in the Registration Statement, any preliminary
prospectus/statement, or the Prospectus, as the case may be.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Fund and the Adviser. The Fund and the
Adviser each severally represents and warrants to the Underwriter as of the date
hereof, as of the Closing Time referred to in Section 2(c) hereof and as of the
Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with
the Underwriter, as follows:
(i) Compliance with Registration Requirements. The Fund meets the
requirements for use of Form N-2 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Fund, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with. If
required, the Fund has received any orders exempting the Fund from any
provisions of the Investment Company Act.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time the Registration Statement, the Rule
462(b) Registration Statement and any amendments or supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act, the Investment Company Act and the Rules and Regulations and
did not and will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading. Neither the Prospectus, nor any
amendments or supplements thereto, at the time the Prospectus or any
amendments or supplements thereto were issued and at the Closing Time
included or will include an untrue statement of a material fact or omitted
or will omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The representations and warranties in this subsection
shall not apply to statements in or omissions from the Registration
Statement or the Prospectus made in reliance upon and in conformity with
information furnished to the Fund in writing by the Underwriter expressly
for use in the Registration Statement or in the Prospectus. If Rule 434 is
used, the Fund will comply with the requirements of Rule 434.
3
<PAGE> 7
Each preliminary prospectus/statement and the prospectus and
statement of additional information filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 497(c) or Rule 497(h) under the 1933 Act, complied
when so filed in all material respects with the Rules and Regulations and
each preliminary prospectus/statement and the Prospectus delivered to the
Underwriter for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules, if any, included in the
Registration Statement are independent public accountants as required by
the 1933 Act and the Rules and Regulations.
(iii) Financial Statements. The financial statements, included in the
Registration Statement and Prospectus, together with the related schedules
and notes, present fairly the financial position of the Fund at the date
indicated and said statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") applied on a consistent
basis throughout the period involved. The supporting schedules, if any,
included in the Registration Statement present fairly, in accordance with
GAAP, the information required to be stated therein. The information in the
Prospectus under the headings "Description of Capital Stock" and "Portfolio
Composition" has been fairly presented.
(iv) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement and in
the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Fund, whether or
not arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the Fund,
other than those in the ordinary course of business, which are material
with respect to the Fund and (C) except for regular monthly dividends and
special year end distributions related to the Fund's qualification as a
regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended ("Subchapter M of the Code"), on the outstanding
shares of common stock, par value $.10 per share (the "Common Stock"), of
the Fund, there has been no dividend or distribution of any kind declared,
paid or made by the Fund on any class of its capital stock.
(v) Good Standing of the Fund. The Fund has been duly organized and is
validly existing as a corporation in good standing under the laws of the
State of Maryland and has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this
Agreement; and the Fund is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect.
4
<PAGE> 8
(vi) Subsidiaries. The Fund has no subsidiaries.
(vii) Capitalization. The authorized, issued and outstanding capital
stock of the Fund is as set forth in the Prospectus under the caption
"Description of Capital Stock." The outstanding shares of Common Stock have
been duly authorized and validly issued and are fully paid and
non-assessable and the Common Stock conforms to all statements relating
thereto contained in the Prospectus and such description conforms to the
rights set forth in the instruments defining the same.
(viii)Investment Company Act. The Fund is registered with the
Commission under the Investment Company Act as a closed-end,
non-diversified, management investment company, and no order of suspension
or revocation of such registration has been issued or proceedings therefor
initiated or threatened by the Commission.
(ix) Authorization and Description of Shares. The Shares to be
purchased by the Underwriter from the Fund have been duly authorized for
issuance and sale to the Underwriter pursuant to this Agreement, and, when
issued and delivered by the Fund pursuant to this Agreement against payment
of the consideration set forth in this Agreement will be validly issued,
fully paid and non-assessable; the Shares conform to all statements
relating thereto contained in the Prospectus and such description conforms
to the rights set forth in the instruments defining the same; no holder of
the Shares will be subject to personal liability by reason of being such a
holder; and the issuance of the Shares is not subject to the preemptive or
other similar rights of any securityholder of the Fund.
(x) Absence of Defaults and Conflicts. The Fund is not in violation of
its charter or by-laws or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Fund is a party
or by which it or its properties may be bound, or to which any of the
property or assets of the Fund is subject (collectively, "Agreements and
Instruments"), except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement, the Investment Advisory Agreement, the Custody Agreement, the
Auction Agent Agreement and the Letter of Representations referred to in
the Registration Statement (as used herein, the "Advisory Agreement", the
"Custody Agreement," the "Auction Agreement" and the "Letter of
Representations," respectively) and the consummation of the transactions
contemplated in this Agreement and in the Registration Statement (including
the issuance and sale of the Shares and the use of the proceeds from the
sale of the Shares as described in the Prospectus under the caption "Use of
Proceeds") and compliance by the Fund with its obligations under this
Agreement have been duly authorized by all necessary corporate action and
do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or a
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Fund pursuant to the Agreements and Instruments (except
for such conflicts, breaches or defaults or liens, charges or encumbrances
that would not result in a Material Adverse Effect), nor will such action
5
<PAGE> 9
result in any violation of the provisions of the charter or the by-laws of
the Fund, or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Fund or any of its
assets, properties or operations. As used herein, a "Repayment Event" means
any event or condition which gives the holder of any note, debenture or
other evidence of indebtedness (or any person acting on such holder's
behalf) the right to require the repurchase, redemption or repayment of all
or a portion of such indebtedness by the Fund.
(xi) Authorization of Agreements. Each of this Agreement, the Advisory
Agreement and the Custody Agreement has been duly authorized, executed and
delivered by the Fund, and each complies with all applicable provisions of
the Investment Company Act. Each of the Auction Agreement and the Letter of
Representations has been duly authorized for execution and delivery by the
Fund and, when executed and delivered by the Fund, will constitute a valid
and binding obligation of the Fund, enforceable in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization or other laws relating to or affecting creditors' rights and
to general equitable principles.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Fund, threatened against or affecting the Fund, which is required to be
disclosed in the Registration Statement (other than as disclosed therein),
or which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and adversely
affect the properties or assets thereof or the consummation of the
transactions contemplated in this Agreement or the performance by the Fund
of its obligations hereunder; the aggregate of all pending legal or
governmental proceedings to which the Fund is a party or of which any of
its respective property or assets is the subject which are not described in
the Registration Statement, including ordinary routine litigation
incidental to the business, could not reasonably be expected to result in a
Material Adverse Effect.
(xiii)Subchapter M Compliance. The Fund intends to, and will, direct
the investment of the proceeds of the offering described in the
Registration Statement in such a manner as to comply with the requirements
of Subchapter M of the Code, and intends to qualify as a regulated
investment company under Subchapter M of the Code.
(xiv) Accuracy of Exhibits. There are no contracts or documents which
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xv) Possession of Intellectual Property. The Fund owns or possesses,
or can acquire on reasonable terms, adequate patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade names
or other intellectual property (collectively, "Intellectual Property")
necessary to carry on the business now operated by it, and the Fund has not
received any
6
<PAGE> 10
notice or is otherwise aware of any infringement or conflict with asserted
rights of others with respect to any Intellectual Property or of any facts
or circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Fund therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, singly or in the aggregate,
would result in a Material Adverse Effect.
(xvi) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Fund of its obligations
hereunder, in connection with the offering, issuance or sale of the Shares
under this Agreement or the consummation of the transactions contemplated
by this Agreement, except such as have been already obtained or as may be
required under the 1933 Act or the 1940 Act or the Rules and Regulations
and foreign or state securities or blue sky laws.
(xvii)Possession of Licenses and Permits. The Fund possesses such
permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct
the business now operated by it; the Fund is in compliance with the terms
and conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, have a Material Adverse
Effect; all of the Governmental Licenses are valid and in full force and
effect, except when the invalidity of such Governmental Licenses or the
failure of such Governmental Licenses to be in full force and effect would
not have a Material Adverse Effect; and the Fund has not received any
notice of proceedings relating to the revocation or modification of any
such Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(b) Additional Representations of the Adviser. The Adviser represents and
warrants to the Underwriter as of the date hereof and as of the Representation
Date as follows:
(i) Organization and Authority of Adviser. The Adviser has been duly
organized as a limited partnership under the laws of the State of Delaware,
with power and authority to conduct its business as described in the
Registration Statement and the Prospectus.
(ii) Investment Advisers Act. The Adviser is duly registered as an
investment adviser under the Investment Advisers Act of 1940, as amended
(the "Investment Advisers Act"), and is not prohibited by the Investment
Advisers Act or the Investment Company Act, or the rules and regulations
under such acts, from acting under the Advisory Agreement for the Fund as
contemplated by the Registration Statement and the Prospectus.
(iii) Authorization of Agreements. This Agreement has been duly
authorized, executed and delivered by the Adviser; the Advisory Agreement
has been
7
<PAGE> 11
duly authorized, executed and delivered by the Adviser and constitutes a
valid and binding obligation of the Adviser, enforceable in accordance with
its terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization or other laws relating to or affecting creditors' rights and
to general equitable principles; and neither the execution and delivery of
this Agreement or the Advisory Agreement, nor the performance by the
Adviser of its obligations hereunder or thereunder will conflict with, or
result in a breach of any of the terms and provisions of, or constitute,
with or without the giving of notice or the lapse of time or both, a
default under, any agreement or instrument to which the Adviser is a party
or by which it is bound, or any law, order, rule or regulation applicable
to it of any jurisdiction, court, Federal or state regulatory body,
administrative agency or other governmental body, stock exchange or
securities association having jurisdiction over the Adviser or its
respective properties or operations.
(iv) Financial Resources. The Adviser has the financial resources
available to it necessary for the performance of its services and
obligations as contemplated in the Registration Statement and the
Prospectus.
(c) Officers' Certificates. Any certificate signed by any officer of the
Fund or any officer of the Adviser delivered to the Underwriter or to counsel
for the Fund and the Underwriter shall be deemed a representation and warranty
by the Fund or the Adviser, as the case may be, to the Underwriter as to the
matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
(a) Purchase Price. On the basis of the representations and warranties
herein contained, and subject to the terms and conditions herein set forth, the
Fund agrees to sell to the Underwriter and the Underwriter agrees to purchase
from the Fund the Shares at the price per share set forth in Schedule A.
(b) Payment. Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the offices of Brown & Wood llp,
One World Trade Center, New York, New York 10048-0557, or at such other place as
shall be agreed upon by the Underwriter and the Fund, at 9:00 A.M. (Eastern
time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time)
on any given day) business day following the date hereof, or such other time not
later than ten business days after such date as shall be agreed upon by the
Underwriter and the Fund (such time and date of payment and delivery herein
being referred to as "Closing Time").
Payment shall be made to the Fund by wire transfer of immediately
available funds to a bank account designated by the Fund, against delivery to
the Underwriter of certificates for the Shares to be purchased by it.
(c) Denominations; Registration. The Shares shall be represented by
certificates registered in the name of Cede & Co., as nominee for The Depository
Trust Company. The certificates for the Shares will be made available for
examination by the Underwriter not later than 10:00 A.M. on the last business
day prior to Closing Time.
8
<PAGE> 12
SECTION 3. Covenants of the Fund. The Fund covenants with the Underwriter
as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Fund, subject to Section 3(b), will comply with the requirements of Rule 430A or
Rule 434, as applicable, and will notify the Underwriter immediately, and
confirm the notice in writing, (i) if any post-effective amendment to the
Registration Statement shall have become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus/statement, or of the suspension of the qualification of the Shares
for offering or sale in any jurisdiction, or of the initiation or threatening of
any proceedings for any of such purposes, and (v) of the issuance by the
Commission of an order of suspension or revocation of the notification on Form
N-8A of registration of the Fund as an investment company under the Investment
Company Act or the initiation of any proceeding for that purpose. The Fund will
make every reasonable effort to prevent the issuance of any stop order described
in subsection (iv) hereunder or any order of suspension or revocation described
in subsection (v) hereunder and, if any such stop order or order of suspension
or revocation is issued, to obtain the lifting thereof at the earliest possible
moment. The Fund will promptly effect the filings necessary pursuant to Rule
497(c), Rule 497(j) or Rule 497(h) and will take such steps as it deems
necessary to ascertain promptly whether the certificate transmitted for filing
under Rule 497(j) or the form of prospectus and statement of additional
information transmitted for filing under Rule 497(c) or Rule 497(h) was received
for filing by the Commission and, in the event that it was not, it will promptly
file such certificate or prospectus and statement of additional information.
(b) Filing of Amendments. The Fund will give the Underwriter notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment or filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus or
statement of additional information included in the Registration Statement at
the time it became effective or to the Prospectus, whether pursuant to the
Investment Company Act, the 1933 Act, or otherwise, and will furnish the
Underwriter with copies of any such documents a reasonable amount of time prior
to such proposed filing or use, as the case may be, and will not file or use any
such document to which the Underwriter or counsel to the Underwriter and the
Fund shall object.
(c) Delivery of Registration Statements. The Fund has furnished or will
deliver to the Underwriter and counsel to the Underwriter and the Fund, without
charge, signed copies of the notification of registration on Form N-8A and
Registration Statement as originally filed and of each amendment thereto,
(including exhibits filed therewith, or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also deliver
to the Underwriter a conformed copy, without charge, of the Registration
Statement as originally filed and of each amendment thereto (without exhibits)
for the Underwriter. The copies of the Registration Statement and each amendment
thereto furnished to the Underwriter will be
9
<PAGE> 13
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectus. The Fund has delivered to the Underwriter,
without charge, as many copies of each preliminary prospectus/statement as the
Underwriter reasonably requested, and the Fund hereby consents to the use of
such copies for purposes permitted by the 1933 Act. The Fund will furnish to the
Underwriter, without charge, during the period when the Prospectus is required
to be delivered under the 1933 Act, such number of copies of the Prospectus (as
amended or supplemented) as the Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriter will be identical to the electronically transmitted copies thereof
field with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Fund will comply with
the 1933 Act, the Investment Company Act and the Rules and Regulations so as to
permit the completion of the distribution of the Shares as contemplated in this
Agreement and in the Prospectus. If at any time when a prospectus is required by
the 1933 Act to be delivered in connection with sales of the Shares, any event
shall occur or condition shall exist as a result of which it is necessary, in
the opinion of counsel to the Underwriter and the Fund, to amend the
Registration Statement or amend or supplement any Prospectus in order that the
Prospectus will not include any untrue statements of material fact or omit to
state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement any Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Fund will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Fund will
furnish to the Underwriter such number of copies of such amendment or supplement
as the Underwriter may reasonably request.
(f) Blue Sky Qualifications. The Fund will use its best efforts, in
cooperation with the Underwriter, to qualify the Shares for offering and sale
under the applicable securities laws of such states and other jurisdictions as
the Underwriter may designate and to maintain such qualifications in effect for
a period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement; provided,
however, that the Fund shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to subject
itself to taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject. In each jurisdiction in which the Shares have been
so qualified, the Fund will file such statements and reports as may be required
by the laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Fund will timely file such reports pursuant to the
Investment Company Act as are necessary in order to make generally available to
its securityholders as soon
10
<PAGE> 14
as practicable an earnings statement for the purposes of, and to provide the
benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Fund will use the net proceeds received by it from
the sale of the Shares in the manner specified in the Prospectus under "Use of
Proceeds."
(i) Subchapter M. The Fund will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter M of the Code.
(j) Restrictions on Sale of Shares. During a period of 180 days from the
date of the Prospectus, the Fund will not, without your prior written consent,
directly or indirectly (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of any
senior security of the Fund, as defined in Section 18 of the Investment Company
Act, or file any registration statement under the 1933 Act with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of senior securities, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of senior securities, in cash or otherwise. The foregoing sentence shall not
apply to (A) the Shares to be sold hereunder or (B) transactions as contemplated
in the Registration Statement where the Fund has segregated cash, cash
equivalents or liquid securities at the Fund's custodian having a market value
at all times at least equal to the amount of such senior securities.
SECTION 4. Covenants of the Underwriter. The Underwriter covenants and
agrees with the Fund that no later than the second business day succeeding
Closing Time, it will provide the Fund and the Auction Agent (as defined in the
Prospectus) with a listing of Existing Holders (as defined in the Prospectus) of
Shares, the number of shares held by each such Existing Holder and the number of
Shares it is holding as Underwriter as of the date of such notice.
SECTION 5. Payment of Expenses.
(a) Expenses. The Fund will pay all expenses incident to the performance of
its obligations under this Agreement, including (i) the preparation, printing
and filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery to the Underwriter of this Agreement and such
other documents as may be required in connection with the offering, purchase,
sale, issuance or delivery of the Shares, (iii) the preparation, issuance and
delivery of the certificates for the Shares to the Underwriter, including any
stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Shares to the Underwriter, (iv) the fees and
disbursements of the Fund's counsel, accountants and other advisors, (v) the
qualification of the Shares under the securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel to the Underwriter and the Fund in connection
therewith and in connection with the preparation of the Blue Sky Survey and any
supplement thereto, (vi) the printing and delivery to the Underwriter of copies
of each preliminary prospectus/statement, any Term Sheets and of the Prospectus
and any amendments or supplements thereto, (vii) the preparation, printing and
delivery to the Underwriter of copies of the Blue Sky Survey and any supplement
thereto, (viii)
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<PAGE> 15
the fees and expenses of any transfer agent or registrar for the Shares, and
(ix) the fees charged by rating agencies rating the Shares.
(b) Termination of Agreement. If this Agreement is terminated by the
Underwriter in accordance with the provisions of Section 6 or Section 10(a)(i)
hereof, the Fund or the Adviser shall reimburse the Underwriter for all of its
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel to the Fund and the Underwriter.
SECTION 6. Conditions of Underwriter's Obligations. The obligations of the
Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Fund and the Adviser contained in Section 1 hereof, or in the
certificates of any officer of the Fund and the Adviser delivered pursuant to
the provisions hereof, to the performance by the Fund and the Adviser of their
respective covenants and obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration Statement
including any Rule 462(b) Registration Statement has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriter and the Fund. Either (i) a
certificate has been filed with the Commission in accordance with Rule 497(j) or
a prospectus and statement of additional information have been filed with the
Commission in accordance with Rule 497(c), or (ii) a prospectus and statement of
additional information containing the Rule 430A Information shall have been
filed with the Commission in accordance with Rule 497(h) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the Fund has
elected to rely upon Rule 434, a Term Sheet shall have been filed with the
Commission in accordance with Rule 497(h).
(b) Opinion of Counsel for the Fund and the Underwriter. At Closing Time,
the Underwriter shall have received the favorable opinion, dated as of Closing
Time, of Brown & Wood LLP, counsel to the Fund and the Underwriter, to the
effect set forth in Exhibit A hereto.
(c) Opinion of General Counsel of the Adviser. At Closing Time, the
Underwriter shall have received the favorable opinion, dated as of Closing Time,
of Michael J. Hennewinkel, Esq., General Counsel to the Adviser, or a senior
attorney of the Adviser, in form and substance satisfactory to counsel to the
Underwriter, to the effect set forth in Exhibit B hereto and to such further
effect as counsel to the Underwriter may reasonably request.
(d) Opinion of Special New Jersey Counsel to the Fund. At Closing Time, the
Underwriter shall have received the favorable opinion, dated as of Closing Time,
of Shanley & Fisher, P.C., special New Jersey counsel to the Fund, to the effect
set forth in Exhibit C hereto.
(e) Officers' Certificates. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Fund, whether or not arising in the ordinary course of
12
<PAGE> 16
business, and the Underwriter shall have received (A) a certificate of the
President or a Vice President of the Fund, dated as of Closing Time, to the
effect that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct with
the same force and effect as though expressly made at and as of Closing Time,
(iii) the Fund has complied with all agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to Closing Time, and (iv) no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are pending
or are contemplated by the Commission and (B) a certificate of the President or
a Vice President of the Adviser, dated as of Closing Time, to the effect that
(i) the representations and warranties in Sections 1(a) and 1(b) hereof are true
and correct with the same force and effect as though expressly made at and as of
Closing Time, and (ii) the Adviser has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or prior to
Closing Time.
(f) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Underwriter shall have received from _____________ a letter,
dated such date, in form and substance satisfactory to the Underwriter
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus, to the effect set forth in Exhibit D hereto and to
such further effect as counsel to the Underwriter may reasonably request.
(g) Bring-down Comfort Letter. At Closing Time, the Underwriter shall have
received from _______________ a letter, dated as of Closing Time, to the effect
that they reaffirm the statements made in the letter, furnished pursuant to
subsection (f) of this Section, except that the "specified date" referred to
shall be a date not more than three business days prior to Closing Time.
(h) Ratings Letters. At Closing Time, Standard & Poor's ("S&P") and Moody's
Investors Services, Inc. ("Moody's") shall have confirmed by letter that the
Shares have been rated AAA and "aaa," respectively, by such agencies.
(i) Additional Documents. At Closing Time, counsel to the Fund and the
Underwriter shall have been furnished with such documents and opinions as it may
require for the purpose of enabling it to pass upon the issuance and sale of the
Shares as herein contemplated, or in order to evidence the accuracy of any of
the representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Fund in connection with the
issuance and sale of the Shares as herein contemplated shall be satisfactory in
form and substance to the Underwriter and counsel to the Fund and the
Underwriter.
(j) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, may be terminated by the Underwriter by notice to the Fund at any
time at or prior to Closing Time and such termination shall be without liability
of any party to any other party except as provided in Section 5 and except that
Sections 1, 7, 8 and 9 shall survive any such termination and remain in full
force and effect.
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<PAGE> 17
SECTION 7. Indemnification.
(a) Indemnification of the Underwriter. (1) The Fund and the Adviser
jointly and severally agree to indemnify and hold harmless the Underwriter and
each person, if any, who controls the Underwriter within the meaning of Section
15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus/statement or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, provided that
(subject to Section 7(d) below) any such settlement is effected with the
written consent of the indemnifying party; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by the Underwriter)
reasonably incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency
or body, commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434 Information, if
applicable, or any preliminary prospectus/statement or the Prospectus (or any
amendment or supplement thereto).
(2) Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of the Underwriter
or who controls the Underwriter within the meaning of Section 15 of the 1933 Act
and who, at the date of this Agreement, is a director or officer of the Fund or
controls the Fund within the meaning of
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<PAGE> 18
Section 15 of the 1933 Act, such indemnity agreement is subject to the
undertaking of the Fund in the Registration Statement under Item 29 thereof.
(b) Indemnification of Fund, Adviser and Directors and Officers. The
Underwriter agrees to indemnify and hold harmless the Fund and the Adviser,
their respective directors, each of the Fund's officers who signed the
Registration Statement, and each person, if any, who controls the Fund or the
Adviser within the meaning of Section 15 of the 1933 Act, against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) including the Rule 430A
Information and the Rule 434 Information, if applicable, or in any preliminary
prospectus/statement or the Prospectus (or any amendment or supplement thereto)
in reliance upon and in conformity with written information furnished to the
Fund by the Underwriter expressly for use in the Registration Statement (or any
amendment thereto), or any preliminary prospectus/statement or the Prospectus
(or any amendment or supplement thereto).
(c) Actions against Parties, Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 7(a) above,
counsel to the indemnified parties shall be selected by the Underwriter, and, in
the case of parties indemnified pursuant to Section 7(b) above, counsel to the
indemnified parties shall be selected by the Fund and the Adviser. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for the
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 7 or Section 8 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 7(a)(ii) effected without its written consent if
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<PAGE> 19
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
SECTION 8. Contribution. If the indemnification provided for in Section 7
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Fund and the
Adviser on the one hand and the Underwriter on the other hand from the offering
of the Shares pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Fund and the Adviser on the one hand
and of the Underwriter on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Adviser on the one hand
and the Underwriter on the other hand in connection with the offering of the
Shares pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Shares pursuant
to this Agreement (net of underwriting discounts and commissions but before
deducting expenses) received by the Fund, and the total underwriting discount
received by the Underwriter, in each case as set forth on the cover of the
Prospectus, or, if Rule 434 is used, the corresponding location on the Term
Sheet, bear to the aggregate initial public offering price of the Shares as set
forth on such cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund and the Adviser or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 8 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 8. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 8, the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Shares
16
<PAGE> 20
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which the Underwriter has otherwise been
required to pay by reason of any such untrue or alleged untrue statement or
omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 8, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Underwriter, and each director of the Fund and the
Adviser, respectively, each officer of the Fund who signed the Registration
Statement and each person, if any, who controls the Fund and the Adviser within
the meaning of Section 15 of the 1933 Act, shall have the same rights to
contribution as the Fund and the Adviser.
SECTION 9. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Fund or of the Adviser submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of the Underwriter or controlling person, or
by or on behalf of the Fund or the Adviser and shall survive delivery of the
Shares to the Underwriter.
SECTION 10. Termination of Agreement.
(a) Termination; General. The Underwriter may terminate this Agreement by
notice to the Fund, at any time at or prior to Closing Time (i) if there has
been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Fund or the Adviser, whether or not arising
in the ordinary course of business, or (ii) if there has occurred any material
adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Underwriter, impracticable to market the Shares or to enforce
contracts for the sale of the Shares, or (iii) if trading in any securities of
the Fund has been suspended or materially limited by the Commission or the New
York Stock Exchange, or if trading generally on the American Stock Exchange or
the New York Stock Exchange or in the Nasdaq National Market has been suspended
or materially limited, or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices for securities have been required, by any of said
exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 5 hereof,
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<PAGE> 21
and provided further that Sections 1, 6, 7 and 8 shall survive such termination
and remain in full force and effect.
SECTION 11. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriter shall be directed to Merrill Lynch & Co. Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated at North Tower, World Financial Center, New
York, New York 10281-1201, Attention: Shauna Holahan, Director; notices to the
Fund or to the Adviser shall be directed to each of them at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, Attention: Terry K. Glenn, President.
SECTION 12. Parties. This Agreement shall inure to the benefit of and be
binding upon the Underwriter, the Fund, the Adviser and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriter, the Fund, the Adviser and their respective successors and the
controlling persons and officers and directors referred to in Sections 7 and 8
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Underwriter, the Fund and the
Adviser and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Shares from the
Underwriter shall be deemed to be a successor merely by reason of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES
OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein and
the Table of Contents are for convenience only and shall not affect the
construction hereof.
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<PAGE> 22
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Fund a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriter and the Fund and the Adviser in accordance with its
terms.
Very truly yours,
MUNIHOLDINGS NEW JERSEY INSURED
FUND IV, INC.
By:__________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By:__________________________
Authorized Officer
CONFIRMED AND ACCEPTED, as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:______________________________
Authorized Signatory
19
<PAGE> 23
SCHEDULE A
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
(a Maryland corporation)
$_______________
Auction Market Preferred Stock
________ Shares, Series A
________ Shares, Series B
(Liquidation Preference $25,000 per share)
1. The initial public offering price per share for the Shares,
determined as provided in Section 2 hereof shall be $25,000 plus accumulated
dividends, if any, from the date of original issue.
2. The purchase price per share for the Shares to be paid by the
Underwriter shall be $__________ plus accumulated dividends, if any, from the
date of original issue, being an amount equal to the initial offering price set
forth above less $__________ per share.
3. The dividend rate for the Series A AMPS for the initial dividend
period ending ________________shall be ____% and the dividend rate for the
Series B AMPS for the initial dividend period ending ______________ shall be
_____%.
20
<PAGE> 24
Exhibit A
FORM OF OPINION OF FUND'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 6(b)
(i) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland.
(ii) The Fund has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Fund is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Fund, whether or not arising in the ordinary course of
business (a "Material Adverse Effect").
(iv) The authorized, issued and outstanding capital stock of the Fund
is as set forth in the Prospectus under the caption "Description of Capital
Stock." The outstanding shares of Common Stock of the Fund have been duly
authorized and validly issued and are fully paid and nonassessable.
(v) The Shares to be purchased by the Underwriter from the Fund have
been duly authorized for issuance and sale to the Underwriter pursuant to the
Purchase Agreement and, when issued and delivered by the Fund pursuant to the
Purchase Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and non-assessable and
no holder of the Shares is or will be subject to personal liability by reason of
being such a holder.
(vi) The issuance of the Shares is not subject to the preemptive or
other similar rights of any securityholder of the Fund.
(vii) To the best of our knowledge, the Fund does not have any
subsidiaries.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Fund and complies with all applicable provisions of the
Investment Company Act.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the certificate pursuant to Rule 497(j) or the Prospectus pursuant to Rule
497(c) or Rule 497(h), as the case may be, has been made in the manner and
within the time period required by Rule 497(j), Rule 497(c) or Rule 497(h), as
the case may be; and, to the best of our knowledge, no stop order suspending the
A-1
<PAGE> 25
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that purpose
have been instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, and each amendment or supplement to the Registration
Statement and the Prospectus, as of their respective effective or issue dates
(other than the financial statements and supporting schedules included therein
or omitted therefrom, as to which we need express no opinion) complied as to
form in all material respects with the requirements of the 1933 Act, the
Investment Company Act and the Rules and Regulations.
(xi) The form of certificate used to evidence the Shares complies in
all material respects with all applicable statutory requirements and with any
applicable requirements of the charter and by-laws of the Fund. To the best of
our knowledge, there is not pending or threatened any action, suit, proceeding,
inquiry or investigation, to which the Fund is a party, or to which the property
of the Fund is subject, before or brought by any court or governmental agency or
body, domestic or foreign, which might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation of the
transactions contemplated in the Purchase Agreement or the performance by the
Fund of its obligations thereunder, other than those disclosed in the
Prospectus.
(xii) The information in the Prospectus under "Description of AMPS,"
"Description of Capital Stock," "Taxes" and in the Registration Statement under
Item 29, to the extent that it constitutes matters of law, summaries of legal
matters, the Fund's charter and bylaws or legal proceedings, or legal
conclusions, has been reviewed by us and is correct in all material respects.
(xiii) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are not
described as required.
(xiv) All descriptions in the Prospectus of contracts and other
documents to which the Fund is a party are accurate in all material respects; to
the best of our knowledge, there are no franchises, contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments of the Fund
required to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to therein or
filed or incorporated by reference as exhibits thereto, and the descriptions
thereof or references thereto are correct in all material respects.
(xv) To the best of our knowledge, the Fund is not in violation of its
charter or by-laws and no default by the Fund exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note, lease or
other agreement or instrument that is described or referred to in the
Registration Statement or the Prospectus or filed or incorporated by reference
as an exhibit to the Registration Statement.
A-2
<PAGE> 26
(xvi) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act, the
Investment Company Act and the Rules and Regulations, which have been obtained,
or as may be required under the securities or blue sky laws of the various
states, as to which we need express no opinion) is necessary or required in
connection with the due authorization, execution and delivery of the Purchase
Agreement, the Advisory Agreement, the Custody Agreement, the Auction Agreement
and the Letter of Representations or for the offering, issuance, sale or
delivery of the Shares.
(xvii) The Advisory Agreement and the Custody Agreement have each been
duly authorized and approved by the Fund and comply as to form in all material
respects with all applicable provisions of the Investment Company Act, and each
has been duly executed by the Fund.
(xviii) Each of the Auction Agent Agreement and the Letter of
Representations has been duly authorized, executed and delivered by the Fund,
and each constitutes a valid and binding obligation of the Fund, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting creditors'
rights and to general equitable principles.
(xix) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, non-diversified management investment company, and
all required action has been taken by the Fund under the 1933 Act, the
Investment Company Act and the Rules and Regulations to make the public offering
and consummate the sale of the Shares pursuant to the Purchase Agreement; the
provisions of the charter and the by-laws of the Fund comply as to form in all
material respects with the requirements of the Investment Company Act; and, to
the best of their knowledge and information, no order of suspension or
revocation of such registration under the Investment Company Act, pursuant to
Section 8(e) of the Investment Company Act, has been issued or proceedings
therefor initiated or threatened by the Commission.
(xx) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Shares, and the use of the proceeds from the sale of the Shares as described in
the Prospectus under the caption "Use of Proceeds") and compliance by the Fund
with its obligations under the Purchase Agreement do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(xi) of the Purchase Agreement) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Fund pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument, known to us,
to which the Fund is a party or by which it may be bound, or to which any of the
property or assets of the Fund is subject (except for such conflicts, breaches
or defaults or liens, charges or encumbrances that would not have a Material
Adverse Effect), nor will such action result in any violation of the provisions
of the charter or by-laws of the Fund, or any applicable law, statute, rule,
regulation, judgment, order, writ or decree, known to us, of any
A-3
<PAGE> 27
government, government instrumentality or court, domestic or foreign, having
jurisdiction over the Fund or any of its properties, assets or operations.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included or incorporated by
reference therein or omitted therefrom, as to which we need make no statement),
at the time such Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any amendment or supplement thereto
(except for financial statements and schedules and other financial data included
or incorporated by reference therein or omitted therefrom, as to which we need
make no statement), at the time the Prospectus was issued, at the time any such
amended or supplemented prospectus was issued or at the Closing Time, included
or includes an untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates and written statements of responsible officers of and accountants
for the Fund and the Adviser and public officials. Such opinion shall not state
that it is to be governed or qualified by, or that it is otherwise subject to,
any treatise, written policy or other document relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991).
A-4
<PAGE> 28
Exhibit B
FORM OF OPINION OF GENERAL COUNSEL TO THE
INVESTMENT ADVISER TO BE DELIVERED
PURSUANT TO SECTION 6(c)
(i) The Adviser has been duly organized as a limited partnership under
the laws of the State of Delaware, with power and authority to conduct its
business as described in the Registration Statement and in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act and is not prohibited by the Investment Advisers Act or
the Investment Company Act, or the rules and regulations under such Acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement and the Advisory Agreement have been duly
authorized, executed and delivered by the Adviser, and the Advisory Agreement
constitutes a valid and binding obligation of the Adviser, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting creditors'
rights and to general equity principles; and, to the best of his knowledge and
information, neither the execution and delivery of this Agreement or the
Advisory Agreement nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of, any of the
terms and provisions of, or constitute, with or without the giving of notice or
the lapse of time or both, a default under, any agreement or instrument to which
the Adviser is a party or by which the Adviser is bound, or any law, order, rule
or regulation applicable to the Adviser of any jurisdiction, court, Federal or
state regulatory body, administrative agency or other governmental body, stock
exchange or securities association having jurisdiction over the Adviser or its
properties or operations.
(iv) To the best of his knowledge and information, the description of
the Adviser in the Registration Statement and in the Prospectus does not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
C-1
<PAGE> 29
Exhibit C
FORM OF OPINION OF SPECIAL
NEW JERSEY COUNSEL TO THE FUND
i. The information in the Prospectus under the caption "Taxes", to the
extent that it constitutes matters of New Jersey law or legal conclusions
involving matters of New Jersey law, has been reviewed by us and is correct in
all material respects.
ii. Nothing has come to our attention that would lead us to believe
that the information in the Registration Statement under the caption "Investment
Objective and Policies -- Special Considerations Relating to New Jersey
Municipal Bonds" and in Appendix I entitled "Economic and Other Conditions in
New Jersey", at the time such Registration Statement or any amendment became
effective, contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the information under such caption and
in such appendix in the Prospectus, at the time the Prospectus was issued, at
the time any amended or supplemented prospectus was issued or at Closing Time,
included or includes an untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make statements therein, in the
light of the circumstances under which they were made, not misleading.
C-1
<PAGE> 30
Exhibit D
FORM OF ACCOUNTANTS'
COMFORT LETTER PURSUANT TO SECTION 6(e)
i. We are independent public accountants with respect to the Company
within the meaning of the 1933 Act and the 1933 Act Regulations.
ii. In our opinion the financial statements audited by us and included
in the Registration Statement and the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act,
the Investment Company Act and the Rules and Regulations.
Such accountants shall also state that they have performed specified
procedures, not constituting an audit, including a reading of the latest
available interim financial statements of the Fund, a reading of the minute
books of the Fund, made inquiries of officials of the Fund responsible for
financial accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and procedures
nothing came to their attention that caused them to believe that (A) the
unaudited financial statements included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act, the Investment Company Act and of the Rules and
Regulations applicable to unaudited interim financial statements included in
registration statements or are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration Statement, and (B)
during the period from the date of the unaudited financial statements included
in the Registration Statement to a specified date not more than three days prior
to the date of the Purchase Agreement, there was any change in the capital stock
or net assets of the Fund (other than by reason of the issuance of Common Stock
in connection with the Fund's dividend reinvestment plan, as specified in such
letter) or any increase in the long-term debt of the Fund, as compared with
amounts shown on the unaudited financial statements included in the Registration
Statement, except for changes which the Registration Statement discloses have
occurred or may occur; and in addition, they have performed other specified
procedures, not constituting an audit, with respect to certain amounts,
percentages, numerical data, financial information and financial statements
appearing in the Registration Statement, which previously have been specified by
such accountants and which shall be specified in such letter, and have compared
certain of such items with, and have found such items to be in agreement with,
the accounting and financial records of the Fund.
D-1
<PAGE> 1
Exhibit (K)(2)
AUCTION AGENT AGREEMENT
between
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
and
IBJ WHITEHALL BANK & TRUST COMPANY
Dated as of
Relating to
AUCTION MARKET PREFERRED STOCK(R)
("AMPS"(R)),
Series A and B
of
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE> 2
THIS AUCTION AGENT AGREEMENT, dated as of , is between MUNIHOLDINGS
NEW JERSEY INSURED FUND IV, INC., a Maryland corporation (the "Company"), and
IBJ WHITEHALL BANK & TRUST COMPANY, a New York banking corporation.
The Company proposes to duly authorize and issue shares of
Auction Market Preferred Stock(R), Series A ("Series A AMPS"), and
shares of Auction Market Preferred Stock(R), Series B ("Series B AMPS"), each
with a par value of $.10 per share and a liquidation preference of $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared), pursuant to the Company's Articles Supplementary (as
defined below). The Series A AMPS and Series B AMPS are sometimes herein
referred to together as the "AMPS." A separate Auction (as defined below) will
be conducted for each series of AMPS. The Company desires that IBJ Whitehall
Bank & Trust Company perform certain duties as agent in connection with each
Auction of shares of AMPS (in such capacity, the "Auction Agent"), and as the
transfer agent, registrar, dividend disbursing agent and redemption agent with
respect to the shares of AMPS (in such capacity, the "Paying Agent"), upon the
terms and conditions of this Agreement, and the Company hereby appoints IBJ
Whitehall Bank & Trust Company as said Auction Agent and Paying Agent in
accordance with those terms and conditions (hereinafter generally referred to as
the "Auction Agent," except in Sections 3 and 4 below).
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the Company and the Auction Agent agree as follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
1.1. Terms Defined by Reference to Articles Supplementary.
Capitalized terms not defined herein shall have the respective meanings
specified in the Articles Supplementary.
(R) Registered trademark of Merrill Lynch & Co., Inc.
2
<PAGE> 3
1.2. Terms Defined Herein.
As used herein and in the Settlement Procedures (as defined below), the
following terms shall have the following meanings, unless the context otherwise
requires:
(a) "Affiliate" shall mean any Person, other than Merrill
Lynch, Pierce, Fenner & Smith Incorporated, made known to the
Auction Agent to be controlled by, in control of, or under
common control with, the Company or its successors.
(b) "Agent Member" of any Person shall mean such Person's
agent member of the Securities Depository that will act on
behalf of a Bidder.
(c) "Articles Supplementary" shall mean the Articles
Supplementary of the Company, establishing the powers,
preferences and rights of the AMPS, filed on with the State
Department of Assessments and Taxation of the State of
Maryland.
(d) "Auction" shall have the meaning specified in Section 2.1
hereof.
(e) "Auction Procedures" shall mean the Auction Procedures
that are set forth in Paragraph 10 of the Articles
Supplementary.
(f) "Authorized Officer" shall mean each Senior Vice
President, Vice President, Assistant Vice President, Trust
Officer, and Assistant Secretary and Assistant Treasurer of
the Auction Agent assigned to its Corporate Trust and Agency
Group and every other officer or employee of the Auction Agent
designated as an "Authorized Officer" for purposes hereof in a
communication to the Company.
(g) "Broker-Dealer Agreement" shall mean each agreement
between the Auction Agent and a Broker-Dealer substantially in
the form attached hereto as Exhibit A.
(h) "Company Officer" shall mean the Chairman and Chief
Executive Officer, the President, each Vice President (whether
or not designated by a number or word or words added before or
after the title "Vice President"), the Secretary, the
Treasurer, each Assistant Secretary and each Assistant
Treasurer of the Company and every other officer or employee
of the Company designated as a "Company Officer" for purposes
hereof in a notice from the Company to the Auction Agent.
(i) "Holder" shall be a holder of record of one or more shares
of AMPS, listed as such in the stock register maintained by
the Paying Agent pursuant to Section 4.6 hereof.
(j) "Settlement Procedures" shall mean the Settlement
Procedures attached as Exhibit A to the Broker-Dealer
Agreement.
3
<PAGE> 4
1.3. Rules of Construction.
Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of this Agreement:
(a) Words importing the singular number shall include the
plural number and vice versa.
(b) The captions and headings herein are solely for
convenience of reference and shall not constitute a part of
this Agreement nor shall they affect its meaning, construction
or effect.
(c) The words "hereof," "herein," "hereto," and other words of
similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be
to New York City time.
II. THE AUCTION.
2.1. Purpose; Incorporation by Reference of Auction Procedures and
Settlement Procedures.
(a) The Articles Supplementary provide that the Applicable
Rate on shares of each series of AMPS, as the case may be, for
each Dividend Period therefor after the Initial Dividend
Period shall be the rate per annum that a commercial bank,
trust company or other financial institution appointed by the
Company advises results from implementation of the Auction
Procedures. The Board of Directors of the Company has adopted
a resolution appointing IBJ Whitehall Bank & Trust Company as
Auction Agent for purposes of the Auction Procedures. The
Auction Agent hereby accepts such appointment and agrees that,
on each Auction Date, it shall follow the procedures set forth
in this Section 2 and the Auction Procedures for the purpose
of determining the Applicable Rate for the AMPS for the next
Dividend Period therefor. Each periodic operation of such
procedures is hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures
and in the Settlement Procedures are incorporated herein by
reference in their entirety and shall be deemed to be a part
hereof to the same extent as if such provisions were set forth
fully herein.
2.2. Preparation for Each Auction; Maintenance of Registry of
Existing Holders. `
(a) Pursuant to Section 2.5 hereof, the Company shall not
designate any Person to act as a Broker-Dealer without the
prior written approval of the Auction Agent (which approval
shall not be withheld unreasonably). As of the date hereof,
the Company shall provide the Auction Agent with a list of the
Broker-
4
<PAGE> 5
Dealers previously approved by the Auction Agent and shall
cause to be delivered to the Auction Agent for execution by
the Auction Agent a Broker-Dealer Agreement signed by each
such Broker-Dealer. The Auction Agent shall keep such list
current and accurate and shall indicate thereon, or on a
separate list, the identity of each Existing Holder, if any,
whose most recent Order was submitted by a Broker-Dealer on
such list and resulted in such Existing Holder continuing to
hold or purchasing shares of AMPS. Not later than five
Business Days prior to any Auction Date for which any change
in such list of Broker-Dealers is to be effective, the Company
shall notify the Auction Agent in writing of such change and,
if any such change is the addition of a Broker-Dealer to such
list, the Company shall cause to be delivered to the Auction
Agent for execution by the Auction Agent a Broker-Dealer
Agreement signed by such Broker-Dealer. The Auction Agent
shall have entered into a Broker-Dealer Agreement with each
Broker-Dealer prior to the participation of any such
Broker-Dealer in any Auction.
(b) In the event that the Auction Date for any Auction shall
be changed after the Auction Agent shall have given the notice
referred to in clause (vii) of Paragraph (a) of the Settlement
Procedures, the Auction Agent, by such means as the Auction
Agent deems practicable, shall give notice of such change to
the Broker-Dealers not later than the earlier of 9:15 A.M. on
the new Auction Date or 9:15 A.M. on the old Auction Date.
(c) The provisions contained in paragraph 2 of the Articles
Supplementary concerning Special Dividend Periods and the
notification of a Special Dividend Period will be followed by
the Company and, to the extent applicable, the Auction Agent,
and the provisions contained therein are incorporated herein
by reference in their entirety and shall be deemed to be a
part of this Agreement to the same extent as if such
provisions were set forth fully herein.
(d) Except as otherwise provided in paragraph 2(f) of the
Articles Supplementary, whenever the Company intends to
include any net capital gains or other income subject to
regular Federal income tax in any dividend on shares of AMPS,
the Company will notify the Auction Agent of the amount to be
so included at least five Business Days prior to the Auction
Date on which the Applicable Rate for such dividend is to be
established. Whenever the Auction Agent receives such notice
from the Company, in turn it will notify each Broker-Dealer,
who, on or prior to such Auction Date, in accordance with its
Broker-Dealer Agreement, will notify its Beneficial Owners and
Potential Beneficial Owners believed to be interested in
submitting an Order in the Auction to be held on such Auction
Date. Whenever the Company includes any additional amounts in
a dividend as provided in paragraph 2(f) of the Articles
Supplementary, the Company will notify the Auction Agent of
such additional amounts to be so included in such dividend at
least five Business Days prior to the applicable Dividend
Payment Date. Whenever the Auction Agent receives such notice
from the Company, in turn it will notify the Securities
Depository and each Broker-
5
<PAGE> 6
Dealer, who, on or prior to the applicable Dividend Payment
Date, in accordance with its Broker-Dealer Agreement, will
notify its Beneficial Owners.
(ii) If the Company makes a Retroactive Taxable Allocation,
the Company, within 90 days (and generally within 60 days)
after the end of its fiscal year for which a Retroactive
Taxable Allocation is made, will provide notice thereof to the
Auction Agent and to each Holder (initially the Securities
Depository) during such fiscal year at such Holder's address
as the same appears or last appeared on the stock books of the
Company. The Company, within 30 days after such notice is
given to the Auction Agent, will pay to the Auction Agent (who
then will distribute to such Holders), out of funds legally
available therefor, a cash amount equal to the aggregate
Additional Dividend with respect to all Retroactive Taxable
Allocations made to such Holders during the fiscal year in
question.
(e) On each Auction Date, the Auction Agent shall determine
the Reference Rate and the Maximum Applicable Rate. If the
Reference Rate is not quoted on an interest basis but is
quoted on a discount basis, the Auction Agent shall convert
the quoted rate to an Interest Equivalent, as set forth in
paragraph 1 of the Articles Supplementary; or, if the rate
obtained by the Auction Agent is not quoted on an interest or
discount basis, the Auction Agent shall convert the quoted
rate to an interest rate after consultation with the Company
as to the method of such conversion. Not later than 9:30 A.M.
on each Auction Date, the Auction Agent shall notify the
Company and the Broker-Dealers of the Reference Rate so
determined and of the Maximum Applicable Rate.
(ii) If the Reference Rate is the applicable "AA" Composite
Commercial Paper Rate and such rate is to be based on rates
supplied by Commercial Paper Dealers and one or more of the
Commercial Paper Dealers shall not provide a quotation for the
determination of the applicable "AA" Composite Commercial
Paper Rate, the Auction Agent immediately shall notify the
Company so that the Company can determine whether to select a
Substitute Commercial Paper Dealer or Substitute Commercial
Paper Dealers to provide the quotation or quotations not being
supplied by any Commercial Paper Dealer or Commercial Paper
Dealers. The Company promptly shall advise the Auction Agent
of any such selection. If the Company does not select any such
Substitute Commercial Paper Dealer or Substitute Commercial
Paper Dealers, then the rates shall be supplied by the
remaining Commercial Paper Dealer or Commercial Paper Dealers.
(iii) If, after the date of this Agreement, there is any
change in the prevailing rating of AMPS by either of the
rating agencies (or substitute or successor rating agencies)
referred to in the definition of the Maximum Applicable Rate,
thereby resulting in any change in the corresponding
applicable percentage for the AMPS, as set forth in said
definition (the "Percentage"), the Company shall notify the
Auction Agent in writing of such change in the Percentage
prior to 9:00 A.M. on the Auction Date for AMPS next
succeeding such change. The Percentage for the AMPS on the
date of this Agreement is as specified in paragraph 10(a)(vii)
of the Articles Supplementary. The Auction Agent shall be
entitled to rely on the last
6
<PAGE> 7
Percentage of which it has received notice from the Company
(or, in the absence of such notice, the Percentage set forth
in the preceding sentence) in determining the Maximum
Applicable Rate as set forth in Section 2.2(e)(i) hereof.
(f) The Auction Agent shall maintain a current registry of the
Existing Holders of the shares of each series of AMPS for
purposes of each Auction. The Company shall use its best
efforts to provide or cause to be provided to the Auction
Agent within ten Business Days following the date of the
Closing a list of the initial Existing Holders of each series
of AMPS, and the Broker-Dealer of each such Existing Holder
through which such Existing Holder purchased such shares. The
Auction Agent may rely upon, as evidence of the identities of
the Existing Holders, such list, the results of each Auction
and notices from any Existing Holder, the Agent Member of any
Existing Holder or the Broker-Dealer of any Existing Holder
with respect to such Existing Holder's transfer of any shares
of AMPS to another Person.
(ii) In the event of any partial redemption of any series of
AMPS, upon notice by the Company to the Auction Agent of such
partial redemption, the Auction Agent promptly shall request
the Securities Depository to notify the Auction Agent of the
identities of the Agent Members (and the respective numbers of
shares) from the accounts of which shares have been called for
redemption and the person or department at such Agent Member
to contact regarding such redemption, and at least two
Business Days prior to the Auction preceding the date of
redemption with respect to shares of the series being
partially redeemed, the Auction Agent shall request each Agent
Member so identified to disclose to the Auction Agent (upon
selection by such Agent Member of the Existing Holders whose
shares are to be redeemed) the number of shares of such series
of AMPS of each such Existing Holder, if any, to be redeemed
by the Company, provided that the Auction Agent has been
furnished with the name and telephone number of a person or
department at such Agent Member from which it is to request
such information. In the absence of receiving any such
information with respect to an Existing Holder, from such
Existing Holder's Agent Member or otherwise, the Auction Agent
may continue to treat such Existing Holder as having ownership
of the number of shares of the series of AMPS shown in the
Auction Agent's registry of Existing Holders.
(iii) The Auction Agent shall register a transfer of the
ownership of shares of a series of AMPS from an Existing
Holder to another Existing Holder, or to another Person if
permitted by the Company, only if (A) such transfer is made
pursuant to an Auction or (B) if such transfer is made other
than pursuant to an Auction, the Auction Agent has been
notified of such transfer in writing in a notice substantially
in the form of Exhibit C to the Broker-Dealer Agreements, by
such Existing Holder or by the Agent Member of such Existing
Holder. The Auction Agent is not required to accept any notice
of transfer delivered for an Auction unless it is received by
the Auction Agent by 3:00 P.M. on the Business Day next
preceding the applicable Auction Date. The Auction Agent shall
rescind a transfer made on the registry of the Existing
Holders of any shares of AMPS if the
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<PAGE> 8
Auction Agent has been notified in writing, in a notice
substantially in the form of Exhibit D to the Broker-Dealer
Agreement, by the Agent Member or the Broker-Dealer of any
Person that (i) purchased any shares of AMPS and the seller
failed to deliver such shares or (ii) sold any shares of AMPS
and the purchaser failed to make payment to such Person upon
delivery to the purchaser of such shares.
(g) The Auction Agent may request that the Broker-Dealers, as
set forth in Section 3.2(c) of the Broker-Dealer Agreements,
provide the Auction Agent with a list of their respective
customers that such Broker-Dealers believe are Beneficial
Owners of shares of AMPS. The Auction Agent shall keep
confidential any such information and shall not disclose any
such information so provided to any Person other than the
relevant Broker-Dealer and the Company, provided that the
Auction Agent reserves the right to disclose any such
information if it is advised by its counsel that its failure
to do so would be unlawful.
2.3. Auction Schedule.
The Auction Agent shall conduct Auctions in accordance with the
schedule set forth below. Such schedule may be changed by the Auction Agent with
the consent of the Company, which consent shall not be withheld unreasonably.
The Auction Agent shall give notice of any such change to each Broker-Dealer.
Such notice shall be received prior to the first Auction Date on which any such
change shall be effective.
Time Event
By 9:30 A.M. Auction Agent advises the Company and the
Broker-Dealers of the Reference Rate and the
Maximum Applicable Rate as set forth in
Section 2.2(e)(i) hereof.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information
communicated to it by Broker-Dealers as
provided in Paragraph 10(c)(i) of the
Articles Supplementary. Submission deadline
is 1:00 P.M.
Not earlier than Auction Agent makes determinations
1:00 P.M. pursuant to Paragraph 10(d)(i) of the
Articles Supplementary.
By approximately Auction Agent advises the Company of the
3:00 P.M. results of the Auction as provided in
Paragraph 10(d)(ii) of the Articles
Supplementary.
Submitted Bids and Submitted Sell Orders are
accepted and rejected in whole or in part
and shares of AMPS allocated as provided in
Paragraph 10(e) of the Articles
Supplementary.
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<PAGE> 9
Auction Agent gives notice of the Auction
results as set forth in Section 2.4 hereof.
2.4. Notice of Auction Results.
On each Auction Date, the Auction Agent shall notify Broker-Dealers of
the results of the Auction held on such date by telephone or through the Auction
Agent's Auction Processing System as set forth in Paragraph (a) of the
Settlement Procedures.
2.5. Broker-Dealers.
(a) Not later than 12:00 noon on each Auction Date, the
Company shall pay to the Auction Agent in Federal Funds or
similar same-day funds an amount in cash equal to (i) in the
case of any Auction Date immediately preceding a 7-Day
Dividend Period or 28-Day Dividend Period, the product of (A)
a fraction the numerator of which is the number of days in
such Dividend Period (calculated by counting the first day of
such Dividend Period but excluding the last day thereof) and
the denominator of which is 360, times (B) 1/4 of 1%, times
(C) $25,000 times (D) the sum of the aggregate number of
Outstanding shares of AMPS for which the Auction is conducted
and (ii) in the case of any Special Dividend Period, the
amount determined by mutual consent of the Company and the
Broker-Dealers pursuant to Section 3.5 of the Broker-Dealer
Agreements. The Auction Agent shall apply such moneys as set
forth in Section 3.5 of the Broker-Dealer Agreements and shall
thereafter remit to the Company any remaining funds paid to
the Auction Agent pursuant to this Section 2.5(a).
(b) The Company shall not designate any Person to act as a
Broker-Dealer, or permit a Existing Holder or a Potential
Beneficial Owner to participate in Auctions through any Person
other than a Broker-Dealer, without the prior written approval
of the Auction Agent, which approval shall not be withheld
unreasonably. The Company may designate an Affiliate or
Merrill Lynch, Pierce, Fenner & Smith Incorporated to act as a
Broker-Dealer.
(c) The Auction Agent shall terminate any Broker-Dealer
Agreement as set forth therein if so directed by the Company.
(d) Subject to Section 2.5(b) hereof, the Auction Agent from
time to time shall enter into such Broker-Dealer Agreements as
the Company shall request.
(e) The Auction Agent shall maintain a list of Broker-Dealers.
2.6. Ownership of Shares of AMPS and Submission of Bids by the
Company and its Affiliates.
Neither the Company nor any Affiliate of the Company may submit any
Sell Order or Bid, directly or indirectly, in any Auction, except that an
Affiliate of the Company that is a Broker-Dealer may submit a Sell Order or Bid
on behalf of a Beneficial Owner or a Potential
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<PAGE> 10
Beneficial Owner. The Company shall notify the Auction Agent if the Company or,
to the best of the Company's knowledge, any Affiliate of the Company becomes a
Beneficial Owner of any shares of AMPS. Any shares of AMPS redeemed, purchased
or otherwise acquired (i) by the Company shall not be reissued, except in
accordance with the requirements of the Securities Act of 1933, as amended, or
(ii) by its Affiliates shall not be transferred (other than to the Company). The
Auction Agent shall have no duty or liability with respect to enforcement of
this Section 2.6.
2.7. Access to and Maintenance of Auction Records.
The Auction Agent shall afford to the Company, its agents, independent
public accountants and counsel, access at reasonable times during normal
business hours to review and make extracts or copies (at the Company's sole cost
and expense) of all books, records, documents and other information concerning
the conduct and results of Auctions, provided that any such agent, accountant or
counsel shall furnish the Auction Agent with a letter from the Company
requesting that the Auction Agent afford such person access. The Auction Agent
shall maintain records relating to any Auction for a period of two years after
such Auction (unless requested by the Company to maintain such records for such
longer period not in excess of four years, then for such longer period), and
such records, in reasonable detail, shall accurately and fairly reflect the
actions taken by the Auction Agent hereunder. The Company agrees to keep
confidential any information regarding the customers of any Broker-Dealer
received from the Auction Agent in connection with this Agreement or any
Auction, and shall not disclose such information or permit the disclosure of
such information without the prior written consent of the applicable
Broker-Dealer to anyone except such agent, accountant or counsel engaged to
audit or review the results of Auctions as permitted by this Section 2.7,
provided that the Company reserves the right to disclose any such information if
it is advised by its counsel that its failure to do so would (i) be unlawful or
(ii) expose it to liability, unless the Broker-Dealer shall have offered
indemnification satisfactory to the Company. Any such agent, accountant or
counsel, before having access to such information, shall agree to keep such
information confidential and not to disclose such information or permit
disclosure of such information without the prior written consent of the
applicable Broker-Dealer, provided that such agent, accountant or counsel may
reserve the right to disclose any such information if it is advised by its
counsel that its failure to do so would (i) be unlawful or (ii) expose it to
liability, unless the Broker-Dealer shall have offered indemnification
satisfactory to such agent, accountant or counsel.
III. THE AUCTION AGENT AS PAYING AGENT.
3.1. The Paying Agent.
The Board of Directors of the Company has adopted a resolution
appointing IBJ Whitehall Bank & Trust Company as transfer agent, registrar,
dividend disbursing agent and redemption agent for the Company in connection
with any shares of AMPS (in such capacity, the "Paying Agent"). The Paying Agent
hereby accepts such appointment and agrees to act in accordance with its
standard procedures and the provisions of the Articles Supplementary which are
specified herein with respect to the shares of AMPS and as set forth in this
Section 3.
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<PAGE> 11
3.2. The Company's Notices to the Paying Agent.
Whenever any shares of AMPS are to be redeemed, the Company promptly
shall deliver to the Paying Agent a Notice of Redemption, which will be mailed
by the Company to each Holder at least five Business Days prior to the date such
Notice of Redemption is required to be mailed pursuant to the Articles
Supplementary. The Paying Agent shall have no responsibility to confirm or
verify the accuracy of any such Notice.
3.3. The Company to Provide Funds for Dividends, Redemptions and
Additional Dividends.
(a) Not later than noon on each Dividend Payment Date, the
Company shall deposit with the Paying Agent an aggregate
amount of Federal Funds or similar same-day funds equal to the
declared dividends to be paid to Holders on such Dividend
Payment Date, and shall give the Paying Agent irrevocable
instructions to apply such funds to the payment of such
dividends on such Dividend Payment Date.
(b) If the Company shall give a Notice of Redemption, then by
noon of the date fixed for redemption, the Company shall
deposit in trust with the Paying Agent an aggregate amount of
Federal Funds or similar same-day funds sufficient to redeem
such shares of AMPS called for redemption and shall give the
Paying Agent irrevocable instructions and authority to pay the
redemption price to the Holders of shares of AMPS called for
redemption upon surrender of the certificate or certificates
therefor.
(c) If the Company provides notice to the Auction Agent of a
Retroactive Taxable Allocation, the Company, within 30 days
after such notice is given and by noon of the date fixed for
payment of an Additional Dividend, shall deposit in trust with
the Paying Agent an aggregate amount of Federal Funds or
similar same-day funds equal to such Additional Dividend and
shall give the Paying Agent irrevocable instructions and
authority to pay the Additional Dividend to Holders (or former
Holders) entitled thereto.
3.4. Disbursing Dividends, Redemption Price and Additional
Dividends.
After receipt of the Federal Funds or similar same-day funds and
instructions from the Company described in Sections 3.3(a), (b) and (c) above,
the Paying Agent shall pay to the Holders (or former Holders) entitled thereto
(i) on each corresponding Dividend Payment Date, dividends on the shares of
AMPS, (ii) on any date fixed for redemption, the redemption price of any shares
of AMPS called for redemption and (iii) on the date fixed for payment of an
Additional Dividend, such Additional Dividend. The amount of dividends for any
Dividend Period to be paid by the Paying Agent to Holders will be determined by
the Company as set forth in Paragraph 2 of the Articles Supplementary. The
redemption price to be paid by the Paying Agent to the Holders of any shares of
AMPS called for redemption will be determined as set forth in Paragraph 4 of the
Articles Supplementary. The amount of Additional Dividends to be
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<PAGE> 12
paid by the Paying Agent in the event of a Retroactive Taxable Allocation to
Holders will be determined by the Company pursuant to paragraph 2(e) of the
Articles Supplementary. The Company shall notify the Paying Agent in writing of
a decision to redeem any shares of AMPS on or prior to the date specified in
Section 3.2 above, and such notice by the Company to the Paying Agent shall
contain the information required to be stated in a Notice of Redemption required
to be mailed by the Company to such Holders. The Paying Agent shall have no duty
to determine the redemption price and may rely on the amount thereof set forth
in a Notice of Redemption.
IV. THE PAYING AGENT AS TRANSFER AGENT AND REGISTRAR.
4.1. Original Issue of Stock Certificates.
On the Date of Original Issue for any share of AMPS, one certificate
for each series of AMPS shall be issued by the Company and registered in the
name of Cede & Co., as nominee of the Securities Depository, and countersigned
by the Paying Agent. The Company will give the Auction Agent prior written
notice and instruction as to the issuance and redemption of AMPS.
4.2. Registration of Transfer or Exchange of Shares.
Except as provided in this Section 4.2, the shares of each series of
AMPS shall be registered solely in the name of the Securities Depository or its
nominee. If the Securities Depository shall give notice of its intention to
resign as such, and if the Company shall not have selected a substitute
Securities Depository acceptable to the Paying Agent prior to such resignation,
then upon such resignation, the shares of each series of AMPS, at the Company's
request, may be registered for transfer or exchange, and new certificates
thereupon shall be issued in the name of the designated transferee or
transferees, upon surrender of the old certificate in form deemed by the Paying
Agent properly endorsed for transfer with (a) all necessary endorsers'
signatures guaranteed in such manner and form as the Paying Agent may require by
a guarantor reasonably believed by the Paying Agent to be responsible, (b) such
assurances as the Paying Agent shall deem necessary or appropriate to evidence
the genuineness and effectiveness of each necessary endorsement and (c)
satisfactory evidence of compliance with all applicable laws relating to the
collection of taxes in connection with any registration of transfer or exchange
or funds necessary for the payment of such taxes. If the certificate or
certificates for shares of AMPS are not held by the Securities Depository or its
nominee, payments upon transfer of shares in an Auction shall be made in Federal
Funds or similar same-day funds to the Auction Agent against delivery of
certificates therefor.
4.3. Removal of Legend.
Any request for removal of a legend indicating a restriction on
transfer from a certificate evidencing shares of AMPS shall be accompanied by an
opinion of counsel stating that such legend may be removed and such shares may
be transferred free of the restriction described in such legend, said opinion to
be delivered under cover of a letter from a Company Officer authorizing the
Paying Agent to remove the legend on the basis of said opinion.
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<PAGE> 13
4.4. Lost, Stolen or Destroyed Stock Certificates.
The Paying Agent shall issue and register replacement certificates for
certificates represented to have been lost, stolen or destroyed, upon the
fulfillment of such requirements as shall be deemed appropriate by the Company
and by the Paying Agent, subject at all times to provisions of law, the By-Laws
of the Company governing such matters and resolutions adopted by the Company
with respect to lost, stolen or destroyed securities. The Paying Agent may issue
new certificates in exchange for and upon the cancellation of mutilated
certificates. Any request by the Company to the Paying Agent to issue a
replacement or new certificate pursuant to this Section 4.4 shall be deemed to
be a representation and warranty by the Company to the Paying Agent that such
issuance will comply with provisions of applicable law and the By-Laws and
resolutions of the Company.
4.5. Disposition of Canceled Certificates; Record Retention.
The Paying Agent shall retain stock certificates which have been
canceled in transfer or in exchange and accompanying documentation in accordance
with applicable rules and regulations of the Securities and Exchange Commission
for two calendar years from the date of such cancellation. The Paying Agent,
upon written request by the Company, shall afford to the Company, its agents and
counsel access at reasonable times during normal business hours to review and
make extracts or copies (at the Company's sole cost and expense) of such
certificates and accompanying documentation. Upon request by the Company at any
time after the expiration of this two-year period, the Paying Agent shall
deliver to the Company the canceled certificates and accompanying documentation.
The Company, at its expense, shall retain such records for a minimum additional
period of four calendar years from the date of delivery of the records to the
Company and shall make such records available during this period at any time, or
from time to time, for reasonable periodic, special, or other examinations by
representatives of the Securities and Exchange Commission. The Company also
shall undertake to furnish to the Securities and Exchange Commission, upon
demand, either at their principal office or at any regional office, complete,
correct and current hard copies of any and all such records. Thereafter, such
records shall not be destroyed by the Company without the approval of the Paying
Agent, which approval shall not be withheld unreasonably, but will be safely
stored for possible future reference.
4.6. Stock Register.
The Paying Agent shall maintain the stock register, which shall contain
a list of the Holders, the number of shares held by each Holder and the address
of each Holder. The Paying Agent shall record in the stock register any change
of address of a Holder upon notice by such Holder. In case of any written
request or demand for the inspection of the stock register or any other books of
the Company in the possession of the Paying Agent, the Paying Agent will notify
the Company and secure instructions as to permitting or refusing such
inspection. The Paying Agent reserves the right, however, to exhibit the stock
register or other records to any person in case it is advised by its counsel
that its failure to do so would (i) be unlawful or (ii) expose it to liability,
unless the Company shall have offered indemnification satisfactory to the Paying
Agent.
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<PAGE> 14
4.7. Return of Funds.
Any funds deposited with the Paying Agent by the Company for any reason
under this Agreement, including for the payment of dividends or the redemption
of shares of any series of AMPS, that remain with the Paying Agent after 12
months shall be repaid to the Company upon written request by the Company.
V. REPRESENTATIONS AND WARRANTIES.
5.1. Representations and Warranties of the Company.
The Company represents and warrants to the Auction Agent that:
(i) the Company is duly organized and is validly existing as a
corporation in good standing under the laws of the State of Maryland,
and has full power to execute and deliver this Agreement and to
authorize, create and issue the shares of AMPS;
(ii) the Company is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified, management investment company;
(iii) this Agreement has been duly and validly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in
accordance with its terms, subject as to such enforceability to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
equitable principles;
(iv) the forms of the certificates evidencing the shares of each series
of AMPS comply with all applicable laws of the State of Maryland;
(v) the shares of each series of AMPS have been duly and validly
authorized by the Company and, upon completion of the initial sale of
the shares of such series of AMPS and receipt of payment therefor, will
be validly issued, fully paid and nonassessable;
(vi) at the time of the offering of the shares of each series of AMPS,
the shares offered will be registered under the Securities Act of 1933,
as amended, and no further action by or before any governmental body or
authority of the United States or of any state thereof is required in
connection with the execution and delivery of this Agreement or will be
required in connection with the issuance of the shares of AMPS, except
such action as required by applicable state securities or insurance
laws, all of which action will have been taken;
(vii) the execution and delivery of this Agreement and the issuance and
delivery of the shares of each series of AMPS do not and will not
conflict with, violate, or result in a breach of, the terms, conditions
or provisions of, or constitute a default under, the Charter or the
By-Laws of the Company, any law or regulation applicable to the
Company, any order or decree of any court or public authority having
jurisdiction over the Company, or
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<PAGE> 15
any mortgage, indenture, contract, agreement or undertaking to which
the Company is a party or by which it is bound; and
(viii) no taxes are payable upon or in respect of the execution of this
Agreement or will be payable upon or in respect of the issuance of the
shares of each series of AMPS.
5.2. Representations and Warranties of the Auction Agent.
The Auction Agent represents and warrants to the Company that the
Auction Agent is duly organized and is validly existing as a banking corporation
in good standing under the laws of the State of New York, and has the corporate
power to enter into and perform its obligations under this Agreement.
VI. THE AUCTION AGENT.
6.1. Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the
Company hereunder and owes no fiduciary duties to any Person
except as provided by this Agreement.
(b) The Auction Agent undertakes to perform such duties and
only such duties as are set forth specifically in this
Agreement, and no implied covenants or obligations shall be
read into this Agreement against the Auction Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken,
suffered or omitted by it or for any error of judgment made by
it in the performance of its duties under this Agreement. The
Auction Agent shall not be liable for any error of judgment
made in good faith unless the Auction Agent shall have been
negligent in ascertaining (or failing to ascertain) the
pertinent facts.
6.2. Rights of the Auction Agent.
(a) The Auction Agent may rely upon, and shall be protected in
acting or refraining from acting upon, any communication
authorized hereby and any written instruction, notice,
request, direction, consent, report, certificate, share
certificate or other instrument, paper or document reasonably
believed by it to be genuine. The Auction Agent shall not be
liable for acting upon any telephone communication authorized
hereby which the Auction Agent believes in good faith to have
been given by the Company or by a Broker-Dealer. The Auction
Agent may record telephone communications with the Company or
with the Broker-Dealers or with both.
(b) The Auction Agent may consult with counsel of its choice,
and the written advice of such counsel shall be full and
complete authorization and protection in respect of any action
taken, suffered or omitted by it hereunder in good faith and
in reliance thereon.
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<PAGE> 16
(c) The Auction Agent shall not be required to advance, expend
or risk its own funds or otherwise incur or become exposed to
financial liability in the performance of its duties
hereunder. The Auction Agent shall be under no liability for
interest on any money received by it hereunder except as
otherwise agreed in writing with the Company.
(d) The Auction Agent may perform its duties and exercise its
rights hereunder either directly or by or through agents or
attorneys.
6.3. Auction Agent's Disclaimer.
The Auction Agent makes no representation as to the validity or the
adequacy of this Agreement, the Broker-Dealer Agreements or the AMPS.
6.4. Compensation, Expenses and Indemnification.
(a) The Company shall pay to the Auction Agent from time to
time reasonable compensation for all services rendered by it
under this Agreement and under the Broker-Dealer Agreements as
shall be set forth in a separate writing signed by the Company
and the Auction Agent, subject to adjustments if the AMPS no
longer are held of record by the Securities Depository or its
nominee or if there shall be such other change as shall
increase materially the Auction Agent's obligations hereunder
or under the Broker-Dealer Agreements.
(b) The Company shall reimburse the Auction Agent upon its
request for all reasonable expenses, disbursements and
advances incurred or made by the Auction Agent in accordance
with any provision of this Agreement and of the Broker-Dealer
Agreements (including the reasonable compensation, expenses
and disbursements of its agents and counsel), except any
expense, disbursement or advance attributable to its
negligence or bad faith.
(c) The Company shall indemnify the Auction Agent for, and
hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part arising
out of or in connection with its agency under this Agreement
and under the Broker-Dealer Agreements, including the costs
and expenses of defending itself against any claim of
liability in connection with its exercise or performance of
any of its duties hereunder and thereunder, except such as may
result from its negligence or bad faith.
VII. MISCELLANEOUS.
7.1. Term of Agreement.
(a) The term of this Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Company may
terminate this Agreement at any time by so notifying the
Auction Agent, provided that if any AMPS remain outstanding
the Company shall have entered into an agreement in
substantially the form of this Agreement with a successor
auction agent. The Auction Agent may
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<PAGE> 17
terminate this Agreement upon prior notice to the Company on
the date specified in such notice, which date shall be no
earlier than 60 days after delivery of such notice. If the
Auction Agent resigns while any shares of AMPS remain
outstanding, the Company shall use its best efforts to enter
into an agreement with a successor auction agent containing
substantially the same terms and conditions as this Agreement.
(b) Except as otherwise provided in this Section 7.1(b), the
respective rights and duties of the Company and the Auction
Agent under this Agreement shall cease upon termination of
this Agreement. The Company's representations, warranties,
covenants and obligations to the Auction Agent under Sections
5 and 6.4 hereof shall survive the termination hereof. Upon
termination of this Agreement, the Auction Agent shall (i)
resign as Auction Agent under the Broker-Dealer Agreements,
(ii) at the Company's request, deliver promptly to the Company
copies of all books and records maintained by it in connection
with its duties hereunder, and (iii) at the request of the
Company, transfer promptly to the Company or to any successor
auction agent any funds deposited by the Company with the
Auction Agent (whether in its capacity as Auction Agent or as
Paying Agent) pursuant to this Agreement which have not been
distributed previously by the Auction Agent in accordance with
this Agreement.
7.2. Communications.
Except for (i) communications authorized to be made by telephone
pursuant to this Agreement or the Auction Procedures and (ii) communications in
connection with Auctions (other than those expressly required to be in writing),
all notices, requests and other communications to any party hereunder shall be
in writing (including telecopy or similar writing) and shall be given to such
party at its address or telecopier number set forth below:
If to the Company, MuniHoldings New Jersey Insured Fund IV, Inc.
addressed to: 800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: Treasurer
Telephone No.: (609) 282-2800
Telecopier No.: (609) 282-3472
If to the Auction IBJ Whitehall Bank & Trust Company
Agent, addressed to: One State Street
New York, New York 10004
Attention: Auction Window Subcellar 1
Telephone No.: (212) 858-2315
Telecopier No.: (212) 797-1148
or such other address or telecopier number as such party hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when
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<PAGE> 18
delivered at the address specified herein. Communications shall be given on
behalf of the Company by a Company Officer and on behalf of the Auction Agent by
an Authorized Officer.
7.3. Entire Agreement.
This Agreement contains the entire agreement between the parties
relating to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or inferred,
between the parties relating to the subject matter hereof, except for agreements
relating to the compensation of the Auction Agent.
7.4. Benefits.
Nothing herein, express or implied, shall give to any Person, other
than the Company, the Auction Agent and their respective successors and assigns,
any benefit of any legal or equitable right, remedy or claim hereunder.
7.5. Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or
in part, except by a written instrument signed by a duly
authorized representative of the party to be charged. The
Company shall notify the Auction Agent of any change in the
Articles Supplementary prior to the effective date of any such
change. If any such change in the Articles Supplementary
materially increases the Auction Agent's obligations
hereunder, the Company shall obtain the written consent to the
Auction Agent prior to the effective date of such change.
(b) Failure of either party hereto to exercise any right or
remedy hereunder in the event of a breach hereof by the other
party shall not constitute a waiver of any such right or
remedy with respect to any subsequent breach.
7.6. Successors and Assigns.
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and permitted assigns of each of the
Company and the Auction Agent. This Agreement may not be assigned by either
party hereto absent the prior written consent of the other party, which consent
shall not be withheld unreasonably.
7.7. Severability.
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
7.8. Execution in Counterparts.
This Agreement may be executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.
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7.9. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed in said State.
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<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.
MUNIHOLDINGS NEW JERSEY INSURED
FUND IV, INC.
By:
----------------------------------------------
Name:
Title:
IBJ WHITEHALL BANK & TRUST COMPANY
By:
----------------------------------------------
Name:
Title:
20
<PAGE> 1
Exhibit (K)(3)
BROKER-DEALER AGREEMENT
between
IBJ WHITEHALL BANK & TRUST COMPANY
and
[NAME OF BROKER-DEALER]
Dated as of _______, 1998
Relating to
AUCTION MARKET PREFERRED STOCK(R)
("AMPS"(R)),
Series A and B
of
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE> 2
BROKER-DEALER AGREEMENT dated as of ______, 1998, between IBJ WHITEHALL
BANK & TRUST COMPANY, a New York banking corporation (the "Auction Agent") (not
in its individual capacity, but solely as agent of MuniHoldings New Jersey
Insured Fund IV, Inc., a Maryland corporation (the "Company"), pursuant to
authority granted to it in the Auction Agent Agreement dated as of ______, 1998,
between the Company and the Auction Agent (the "Auction Agent Agreement")), and
[NAME OF BROKER-DEALER] (together with its successors and assigns, "BD").
The Company proposes to duly authorize and issue _____ shares of
Auction Market Preferred Stock(R), Series A ("Series A AMPS"), and _____ shares
of Auction Market Preferred Stock(R), Series B ("Series B AMPS"), each with a
par value of $.10 per share and a liquidation preference of $25,000 per share
plus accumulated but unpaid dividends (whether or not earned or declared), each
pursuant to the Company's Articles Supplementary (as defined below). The Series
A AMPS and Series B AMPS are sometimes herein referred to together as the
"AMPS."
The Company's Articles Supplementary provide that the dividend rate on
each series of AMPS for each Dividend Period therefor after the Initial Dividend
Period shall be the Applicable Rate therefor, which in each case, in general
shall be the rate per annum that a commercial bank, trust company or other
financial institution appointed by the Company advises results from
implementation of the Auction Procedures (as defined below). The Board of
Directors of the Company has adopted a resolution appointing IBJ Whitehall Bank
& Trust Company as Auction Agent for purposes of the Auction Procedures, and
pursuant to Section 2.5(d) of the Auction Agent Agreement, the Company has
requested and directed the Auction Agent to execute and deliver this Agreement.
The Auction Procedures require the participation of one or more
Broker-Dealers.
- ----------
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE> 3
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the Auction Agent and BD agree as follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
1.1. Terms Defined by Reference to the Articles Supplementary.
Capitalized terms not defined herein shall have the respective meanings
specified in the Articles Supplementary of the Company.
1.2. Terms Defined Herein. As used herein and in the Settlement
Procedures (as defined below), the following terms shall have the following
meanings, unless the context otherwise requires:
(a) "Articles Supplementary" shall mean the Articles
Supplementary, as amended, of the Company, establishing the powers, preferences
and rights of the AMPS filed on ______, 1998 with the State Department of
Assessments and Taxation of Maryland.
(b) "Auction" shall have the meaning specified in Section 3.1
hereof.
(c) "Auction Procedures" shall mean the Auction Procedures that
are set forth in Paragraph 10 of the Articles Supplementary.
(d) "Authorized Officer" shall mean each Senior Vice President,
Vice President, Assistant Vice President, Trust Officer, Assistant Secretary and
Assistant Treasurer of the Auction Agent assigned to its Corporate Trust and
Agency Group and every other officer or employee of the Auction Agent designated
as an "Authorized Officer" for purposes of this Agreement in a communication to
BD.
(e) "BD Officer" shall mean each officer or employee of BD
designated as a "BD Officer" for purposes of this Agreement in a communication
to the Auction Agent.
(f) "Broker-Dealer Agreement" shall mean this Agreement and any
substantially similar agreement between the Auction Agent and a Broker-Dealer.
(g) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit A.
1.3. Rules of Construction. Unless the context or use indicates another
or different meaning or intent, the following rules shall apply to the
construction of this Agreement:
(a) Words importing the singular number shall include the plural
number and vice versa.
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement, nor shall they
affect its meaning, construction or effect.
2
<PAGE> 4
(c) The words "hereof," "herein," "hereto," and other words of
similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to
New York City time.
II. NOTIFICATION OF DIVIDEND PERIOD AND ADVANCE NOTICE OF ALLOCATION OF TAXABLE
INCOME.
2.1. The provisions contained in paragraph 2 of the Articles
Supplementary concerning the notification of a Special Dividend Period will be
followed by the Auction Agent and BD, and the provisions contained therein are
incorporated herein by reference in their entirety and shall be deemed to be a
part of this Agreement to the same extent as if such provisions were set forth
fully herein.
2.2. Except as otherwise provided in paragraph 2(f) of the Articles
Supplementary, whenever the Company intends to include any net capital gains or
other income subject to regular Federal income tax in any dividend on shares of
any series of AMPS, the Company will notify the Auction Agent of the amount to
be so included at least five Business Days prior to the Auction Date on which
the Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Company, in turn it will notify BD, who, on
or prior to such Auction Date, will notify its Beneficial Owners and Potential
Beneficial Owners believed to be interested in submitting an Order in the
Auction to be held on such Auction Date. Whenever the Company intends to include
any additional amounts in a dividend as provided in paragraph 2(f) of the
Articles Supplementary, the Company will notify the Auction Agent of such
additional amounts to be so included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date. Whenever the Auction Agent
receives such notice from the Company, in turn it will notify the Securities
Depository and BD, who, on or prior to the applicable Dividend Payment Date,
will notify its Beneficial Owners.
III. THE AUCTION.
3.1. Purpose; Incorporation by Reference of Auction Procedures and
Settlement Procedures.
(a) On each Auction Date, the provisions of the Auction Procedures
will be followed by the Auction Agent for the purpose of determining the
Applicable Rate for each series of AMPS, for the next Dividend Period therefor.
Each periodic operation of such procedures is hereinafter referred to as an
"Auction."
(b) All of the provisions contained in the Auction Procedures and
the Settlement Procedures are incorporated herein by reference in their entirety
and shall be deemed to be a part of this Agreement to the same extent as if such
provisions were set forth fully herein.
(c) BD agrees to act as, and assumes the obligations of and
limitations and restrictions placed upon, a Broker-Dealer under this Agreement.
BD understands that other Persons meeting the requirements specified in the
definition of "Broker-Dealer" contained in
3
<PAGE> 5
Paragraph 1 of the Articles Supplementary may execute a Broker-Dealer Agreement
and participate as Broker-Dealers in Auctions.
(d) BD and other Broker-Dealers may participate in Auctions for
their own accounts. However, the Company, by notice to BD and all other Broker
Dealers, may prohibit all Broker-Dealers from submitting Bids in Auctions for
their own accounts, provided that Broker-Dealers may continue to submit Hold
Orders and Sell Orders.
3.2. Preparation for Each Auction.
(a) Not later than 9:30 A.M. on each Auction Date for the AMPS,
the Auction Agent shall advise BD by telephone of the Reference Rate and the
Maximum Applicable Rate in effect on such Auction Date.
(b) In the event that the Auction Date for any Auction shall be
changed after the Auction Agent has given the notice referred to in clause (vii)
of paragraph (a) of the Settlement Procedures, the Auction Agent, by such means
as the Auction Agent deems practicable, shall give notice of such change to BD
not later than the earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M. on
the old Auction Date. Thereafter, BD promptly shall notify customers of BD that
BD believes are Beneficial Owners of shares of AMPS of such change in the
Auction Date.
(c) The Auction Agent from time to time may request BD to provide
it with a list of the respective customers BD believes are Beneficial Owners of
shares of each series of AMPS. BD shall comply with any such request, and the
Auction Agent shall keep confidential any such information, including
information received as to the identity of Bidders in any Auction, and shall not
disclose any such information so provided to any Person other than the Company;
and such information shall not be used by the Auction Agent or its officers,
employees, agents or representatives for any purpose other than such purposes as
are described herein. The Auction Agent shall transmit any list of customers BD
believes are Beneficial Owners of shares of each series of AMPS and information
related thereto only to its officers, employees, agents or representatives in
the Corporate Trust and Agency Group who need to know such information for the
purposes of acting in accordance with this Agreement, and the Auction Agent
shall prevent the transmission of such information to others and shall cause its
officers, employees, agents and representatives to abide by the foregoing
confidentiality restrictions; provided, however, that the Auction Agent shall
have no responsibility or liability for the actions of any of its officers,
employees, agents or representatives after they have left the employ of the
Auction Agent.
3.3. Auction Schedule; Method of Submission of Orders.
(a) The Company and the Auction Agent shall conduct Auctions for
each series of AMPS in accordance with the schedule set forth below. Such
schedule may be changed at any time by the Auction Agent with the consent of the
Company, which consent shall not be withheld unreasonably. The Auction Agent
shall give notice of any such change to BD. Such notice shall be received prior
to the first Auction Date on which any such change shall be effective.
4
<PAGE> 6
Time Event
---- -----
By 9:30 A.M. Auction Agent advises the Company and
Broker-Dealers of the Reference Rate and the
Maximum Applicable Rate as set forth in
Section 3.2(a) hereof.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information
communicated to it by Broker- Dealers as
provided in Paragraph 10(c)(i) of the
Articles Supplementary. Submission Deadline
is 1:00 P.M.
Not earlier than 1:00 P.M. Auction Agent makes determinations pursuant
to Paragraph 10(d)(i) of the Articles
Supplementary.
By approximately 3:00 P.M. Auction Agent advises the Company of the
results of the Auction as provided in
Paragraph 10(d)(ii) of the Articles
Supplementary.
Submitted Bids and Submitted Sell Orders are
accepted and rejected in whole or in part
and shares of AMPS are allocated as provided
in Paragraph 10(e) of the Articles
Supplementary.
Auction Agent gives notice of the Auction
results as set forth in Section 3.4(a)
hereof.
(b) BD agrees to maintain a list of Potential Beneficial Owners
and to contact the Potential Beneficial Owners on such list on or prior to each
Auction Date for the purposes set forth in Paragraph 10 of the Articles
Supplementary.
(c) BD shall submit Orders to the Auction Agent in writing in
substantially the form attached hereto as Exhibit B. BD shall submit separate
Orders to the Auction Agent for each Potential Beneficial Owner or Beneficial
Owner on whose behalf BD is submitting an Order and shall not net or aggregate
the Orders of Potential Beneficial Owners or Beneficial Owners on whose behalf
BD is submitting Orders.
(d) BD shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit C, of transfers of shares
of any series of AMPS, made through BD by an Existing Holder to another Person
other than pursuant to an Auction, and (ii) a written notice, substantially in
the form attached hereto as Exhibit D, of the failure of shares of any series of
any series of AMPS to be transferred to or by any Person that purchased or sold
shares of any series of AMPS through BD pursuant to an Auction. The Auction
Agent is not required to accept any notice delivered pursuant to the terms of
the foregoing sentence with respect to an Auction unless it is received by the
Auction Agent by 3:00 P.M. on the Business Day next preceding the applicable
Auction Date.
5
<PAGE> 7
3.4. Notice of Auction Results.
(a) On each Auction Date, the Auction Agent shall notify BD by
telephone as set forth in paragraph (a) of the Settlement Procedures. On the
Business Day next succeeding such Auction Date, the Auction Agent shall notify
BD in writing of the disposition of all Orders submitted by BD in the Auction
held on such Auction Date.
(b) BD shall notify each Beneficial Owner, Potential Beneficial
Owner, Existing Holder or Potential Holder on whose behalf BD has submitted an
Order as set forth in paragraph (b) of the Settlement Procedures, and take such
other action as is required of BD pursuant to the Settlement Procedures.
If any Beneficial Owner or Existing Holder selling shares of AMPS in an
Auction fails to deliver such shares, the BD of any Person that was to have
purchased shares of such series of AMPS in such Auction may deliver to such
Person a number of whole shares of such series of AMPS that is less than the
number of shares that otherwise was to be purchased by such Person. In such
event, the number of shares of such series of AMPS to be so delivered shall be
determined by such BD. Delivery of such lesser number of shares shall constitute
good delivery. Upon the occurrence of any such failure to deliver shares, such
BD shall deliver to the Auction Agent the notice required by Section 3.3(d)(ii)
hereof. Notwithstanding the foregoing terms of this Section 3.4(b), any delivery
or non-delivery of shares of any series of AMPS which represents any departure
from the results of an Auction, as determined by the Auction Agent, shall be of
no effect unless and until the Auction Agent shall have been notified of such
delivery or non-delivery in accordance with the terms of Section 3.3(d) hereof.
The Auction Agent shall have no duty or liability with respect to enforcement of
this Section 3.4(b).
3.5. Service Charge to Be Paid to BD. On the Business Day next
succeeding each Auction Date, the Auction Agent shall pay to BD from moneys
received from the Company an amount equal to: (a) in the case of any Auction
Date immediately preceding a 7-Day Dividend Period or 28-Day Dividend Period,
the product of (i) a fraction the numerator of which is the number of days in
such Dividend Period (calculated by counting the first day of such Dividend
Period but excluding the last day thereof) and the denominator of which is 360,
times (ii) 1/4 of 1%, times (iii) $25,000, times (iv) the sum of (A) the
aggregate number of AMPS placed by BD in the applicable Auction that were (x)
the subject of a Submitted Bid of a Beneficial Owner submitted by BD and
continued to be held as a result of such submission and (y) the subject of a
Submitted Bid of a Potential Beneficial Owner submitted by BD and were purchased
as a result of such submission plus (B) the aggregate number of AMPS subject to
valid Hold Orders (determined in accordance with Paragraph 10 of the Articles
Supplementary) submitted to the Auction Agent by BD plus (C) the number of AMPS
deemed to be subject to Hold Orders by Beneficial Owners pursuant to Paragraph
10 of the Articles Supplementary that were acquired by such Beneficial Owners
through BD; and (b) in the case of any Auction Date immediately preceding a
Special Dividend Period, that amount as mutually agreed upon by the Company and
BD, based on the selling concession that would be applicable to an underwriting
of fixed or variable rate preferred shares with a similar final maturity or
variable rate dividend period, at the commencement of such Special Dividend
Period.
6
<PAGE> 8
For purposes of subclause (a)(iv)(C) of the foregoing sentence, if any
Beneficial Owner who acquired shares of any series of AMPS through BD transfers
those shares to another Person other than pursuant to an Auction, then the
Broker-Dealer for the shares so transferred shall continue to be BD, provided,
however, that if the transfer was effected by, or if the transferee is, a
Broker-Dealer other than BD, then such Broker-Dealer shall be the Broker-Dealer
for such shares.
IV. THE AUCTION AGENT.
4.1. Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the Company
hereunder and owes no fiduciary duties to any other Person by reason of this
Agreement.
(b) The Auction Agent undertakes to perform such duties and only
such duties as are set forth specifically in this Agreement, and no implied
covenants or obligations shall be read into this Agreement against the Auction
Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken, suffered or omitted by
it, or for any error of judgment made by it in the performance of its duties
under this Agreement. The Auction Agent shall not be liable for any error of
judgment made in good faith unless the Auction Agent shall have been negligent
in ascertaining (or failing to ascertain) the pertinent facts.
4.2. Rights of the Auction Agent.
(a) The Auction Agent may rely upon, and shall be protected in
acting or refraining from acting upon, any communication authorized by this
Agreement and any written instruction, notice, request, direction, consent,
report, certificate, share certificate or other instrument, paper or document
believed by it to be genuine. The Auction Agent shall not be liable for acting
upon any telephone communication authorized by this Agreement which the Auction
Agent believes in good faith to have been given by the Company or by BD. The
Auction Agent may record telephone communications with BD.
(b) The Auction Agent may consult with counsel of its own choice,
and the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial liability
in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its
rights hereunder either directly or by or through agents or attorneys.
4.3. Auction Agent's Disclaimer. The Auction Agent makes no
representation as to the validity or adequacy of this Agreement or the AMPS.
7
<PAGE> 9
V. MISCELLANEOUS.
5.1. Termination. Any party may terminate this Agreement at any time
upon five days' prior written notice to the other party; provided, however, that
if BD is Merrill Lynch, Pierce, Fenner & Smith Incorporated, neither BD nor the
Auction Agent may terminate this Agreement without first obtaining the prior
written consent of the Company to such termination, which consent shall not be
withheld unreasonably.
5.2. Participant in Securities Depository; Payment of Dividends in
Same-Day Funds.
(a) BD is, and shall remain for the term of this Agreement, a
member of, or a participant in, the Securities Depository (or an affiliate of
such a member or participant).
(b) BD represents that it (or if BD does not act as Agent Member,
one of its affiliates) shall make all dividend payments on the AMPS available in
same-day funds on each Dividend Payment Date to customers that use BD (or its
affiliate) as Agent Member.
5.3. Agent Member. At the date hereof, BD is a participant of the
Securities Depository.
5.4. Communications. Except for (i) communications authorized to be
made by telephone pursuant to this Agreement or the Auction Procedures and (ii)
communications in connection with the Auctions (other than those expressly
required to be in writing), all notices, requests and other communications to
any party hereunder shall be in writing (including telecopy or similar writing)
and shall be given to such party at its address or telecopier number set forth
below:
If to BD, addressed to:
----------------------------------
----------------------------------
----------------------------------
Attention:
Telecopier No.: (212) 449-4321
Telephone No.: (212) 449-6500
If to the Auction Agent, addressed to: IBJ Whitehall Bank & Trust Company
One State Street
New York, New York 10004
Attention: Auction Window
Subcellar 1
Telecopier No.: (212) 797-1148
Telephone No.: (212) 858-2135
or such other address or telecopier number as such party hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of BD by a
8
<PAGE> 10
BD Officer and on behalf of the Auction Agent by an Authorized Officer. BD may
record telephone communications with the Auction Agent.
5.5. Entire Agreement. This Agreement contains the entire agreement
between the parties relating to the subject matter hereof, and there are no
other representations, endorsements, promises, agreements or understandings,
oral, written or inferred, between the parties relating to the subject matter
hereof.
5.6. Benefits. Nothing in this Agreement, express or implied, shall
give to any person, other than the Company, the Auction Agent and BD and their
respective successors and assigns, any benefit of any legal or equitable right,
remedy or claim under this Agreement.
5.7. Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part, except by
a written instrument signed by a duly authorized representative of the party to
be charged.
(b) Failure of either party to this Agreement to exercise any
right or remedy hereunder in the event of a breach of this Agreement by the
other party shall not constitute a waiver of any such right or remedy with
respect to any subsequent breach.
5.8. Successors and Assigns. This Agreement shall be binding upon,
inure to the benefit of, and be enforceable by, the respective successors and
permitted assigns of each of BD and the Auction Agent. This Agreement may not be
assigned by either party hereto absent the prior written consent of the other
party;
provided, however, that this Agreement may be assigned by the Auction Agent to a
successor Auction Agent selected by the Company without the consent of BD.
5.9. Severability. If any clause, provision or section of this
Agreement shall be ruled invalid or unenforceable by any court of competent
jurisdiction, the invalidity or unenforceability of such clause, provision or
section shall not affect any remaining clause, provision or section hereof.
5.10. Execution in Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
5.11. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to agreements
made and to be performed in said State.
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<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.
IBJ WHITEHALL BANK & TRUST COMPANY
-------------------------------------------
By:
Title:
[NAME OF BROKER-DEALER]
-------------------------------------------
By:
Title:
10
<PAGE> 12
EXHIBIT A
SETTLEMENT PROCEDURES
[From Prospectus]
<PAGE> 13
EXHIBIT B
IBJ WHITEHALL BANK & TRUST COMPANY
AUCTION BID FORM
<TABLE>
<S> <C>
Submit To: IBJ Whitehall Bank & Trust Co. Issue: MuniHoldings New Jersey Insured Fund IV, Inc.
Securities Transfer Department
One State Street Series: _______________________
New York, New York 10004 Auction Date:__________________
Attention: Auction Window
Telephone: (212) 858-2272
Facsimile: (212) 797-1148
</TABLE>
The undersigned Broker-Dealer submits the following Order on behalf of
the Bidder listed below:
Name of Bidder:
----------------------- BENEFICIAL OWNER
Shares now held: HOLD
----------------------- ----------------------------
BID at rate of
-------------------
SELL
----------------------------
POTENTIAL BENEFICIAL OWNER
# of shares bid
-----------------
BID at rate of
-----------------
Notes:
(1) If submitting more than one Bid for one Bidder, use additional Auction
Bid Forms.
(2) If one or more Bids covering in the aggregate more than the number of
outstanding shares held by any Beneficial Owner are submitted, such bid
shall be considered valid in the order of priority set forth in the
Auction Procedures on the above issue.
(3) A Hold or Sell Order may be placed only by a Beneficial Owner covering
a number of shares not greater than the number of shares currently
held.
(4) Potential Beneficial Owners may make only Bids, each of which must
specify a rate. If more than one Bid is submitted on behalf of any
Potential Beneficial Owner, each Bid submitted shall be a separate Bid
with the rate specified.
(5) Bids may contain no more than three figures to the right of the decimal
point (.001 of 1%). Fractions will not be accepted.
NAME OF BROKER-DEALER
--------------------------------------
Authorized Signature
--------------------------------------
<PAGE> 14
EXHIBIT C
(Note: To be used only for transfers made
other than pursuant to an Auction)
TRANSFER FORM
Re: MuniHoldings New Jersey Insured Fund IV, Inc.
Auction Market Preferred Stock(R),
Series [A][B] ("AMPS"(R))
We are (check one):
/ / the Existing Holder named below;
/ / the Broker-Dealer for such Existing Holder; or
/ / the Agent Member for such Existing Holder.
We hereby notify you that such Beneficial Owner has transferred
shares of AMPS to .
- -------------- --------------
---------------------------------------
(Name of Existing Holder)
---------------------------------------
(Name of Broker-Dealer)
---------------------------------------
(Name of Agent Member)
By
------------------------------------
Printed Name:
Title:
<PAGE> 15
EXHIBIT D
(Note: To be used only for failures to deliver
AMPS sold pursuant to an Auction)
NOTICE OF A FAILURE TO DELIVER
Complete either I or II
I. We are a Broker-Dealer for ______________________ (the "Purchaser"),
which purchased ___________ shares of AMPS, Series [A][B], of
MuniHoldings New Jersey Insured Fund IV, Inc. in the Auction held on
________ from the seller of such shares.
II. We are a Broker-Dealer for ______________________ (the "Seller"), which
sold _______ shares of AMPS, Series [A][B], of MuniHoldings New Jersey
Insured Fund IV, Inc. in the Auction held on ________ to the Purchaser
of such shares.
We hereby notify you that (check one):
____________ the Seller failed to deliver such shares to the Purchaser
____________ the Purchaser failed to make payment to the Seller upon
delivery of such shares
Name: ____________________________
(Name of Broker-Dealer)
By: ____________________________
Printed Name:
Title:
<PAGE> 1
Exhibit (K)(4)
BOOK-ENTRY-ONLY AUCTION-RATE/MONEY MARKET PREFERRED/AND
REMARKETED PREFERRED SECURITIES
LETTER OF REPRESENTATIONS
[To be Completed by Issuer and Trust Company]
MuniHoldings New Jersey Insured Fund IV, Inc.
[Name of Issuer]
IBJ Whitehall Bank & Trust Company
[Name of Trust Company]
Attention: General Counsel's Office , 1999
THE DEPOSITORY TRUST COMPANY [Date]
55 Water Street; 49th Floor
New York, NY 10041-0099
Re: MuniHoldings New Jersey Insured Fund IV, Inc.
Issuance of Auction Market Preferred Shares ("AMPS")
Series A (# ) and Series B (# )
[Issue Description, including CUSIP number]
Ladies and Gentlemen:
This letter sets forth our understanding with respect to certain
matters relating to the above-referenced issue (the "Securities"). Trust Company
will act as transfer agent, registrar, dividend disbursing agent, and redemption
agent with respect to the Securities. The Securities will be issued pursuant to
a prospectus, private placement memorandum, or other such document authorizing
the issuance of a Securities dated _________, 1999 (the "Document"). Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ["Underwriter"]
is distributing the Securities through the Depositary Trust Company ("DTC").
To induce DTC to accept the Securities as eligible for deposit at DTC,
and to act in accordance with respect to the Securities, Issue and Trust Company
make the following representations to DTC:
1. Prior to closing on the Securities on _________, 1999, there shall
be deposited with DTC one Security certificate registered in the name of DTC's
nominee, Cede & Co., which represents the total
<PAGE> 2
number of Securities issued. Said certificate shall remain in DTC's custody as
provided in the Document. If however, the aggregate principal amount of the
Securities exceed $200 million, one certificate will be issued with respect to
each $200 million of principal amount and an additional certificate will be
issued with respect to any remaining principal amount. Each Security certificate
shall bear the following legend:
Unless this certificate is presented by an authorized
representative of The Depository Trust Company, a New York corporation
("DTC"), to issuer or its agent for registration of transfer, exchange,
or payment, and any certificate issued is registered in the name of
Cede & Co., or in such other name as is requested by an authorized
representative of DTC (and any payment is made to Cede & Co. or to such
other entity as is requested by an authorized representative of DTC),
ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede
& Co., has an interest therein.
2. Issuer: (a) understands that DTC has no obligation to, and will not,
communicate to its Participants or to any person having an interest in the
Securities any information contained in the Security certificate(s); and (b)
acknowledges that neither DTC's Participants nor any person having an interest
in the Securities shall be deemed to have notice of the provisions of the
Security certificate(s) by virtue of submission of such certificate(s) to DTC.
3. In the event of any solicitation of consents from or voting by
holders of the Securities, Issuer shall establish a record date for such
purposes (with no provision for revocation of consents or votes by subsequent
holders) and shall send notice of such record date to DTC not less than 15
calendar days in advance of such record date. Notices to DTC pursuant to this
Paragraph by telecopy shall be sent to DTC's Reorganization Department at (212)
709-6896 or (212) 709-6897, and receipt of such notices shall be confirmed by
telephoning (212) 709-6870. Notices to DTC pursuant to this Paragraph by mail or
by any other means shall be sent to DTC's Reorganization Department as indicated
in Paragraph 5.
4. In the event of a full or partial redemption of the outstanding
Securities, Issuer or Trust Company shall send a notice to DTC specifying: (a)
the number of Securities to be redeemed; and (b) the date such notice is to be
distributed to Security holders or published (the "Publication Date"). Such
notice shall be sent to DTC by a secure means (e.g., legible telecopy,
registered or certified mail, overnight delivery) in a timely manner designed to
assure that such notice is in DTC's possession no later than the close of
business on the business day before or, if possible, two business days before
the Publication Date. Issuer or Trust Company shall forward such notice either
in a separate secure transmission for each CUSIP number or in a secure
transmission for multiple CUSIP numbers (if applicable) which includes a
manifest or list of each CUSIP number submitted in that transmission. (The party
sending such notice shall have a method to verify subsequently the use of such
means and the timeliness of such notice.) The Publication date shall be not less
than 30 days nor more than 60 days prior to the redemption date. Notices to DTC
pursuant to this Paragraph by telecopy shall be sent to DTC's Call Notification
Department at (516) 227-4039 or (516) 227-4190. If the party sending the notice
does not receive a telecopy receipt from DTC confirming that the notice has been
received, such party shall telephone (516) 227-4070. Notices to DTC pursuant to
this Paragraph by mail or by any other means shall be sent to:
Manager; Call Notification Department
The Depository Trust Company
711 Stewart Avenue
Garden City, NY 11530-4719
5. In the event of an invitation to tender the Securities (including
mandatory tenders, exchanges, and capital changes), notice by Issuer or Trust
Company to Security holder specifying the terms of the
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<PAGE> 3
tender and the Publication Date of such notice shall be sent to DTC by a secure
means in the manner set forth in the preceding Paragraph. Notices to DTC
pursuant to this Paragraph and notices of other corporate action by telecopy
shall be sent to DTC's Reorganization Department at (212) 709-1093 or (212)
709-1094, and receipt of such notices shall be confirmed by telephoning (212)
709-6884. Notices to DTC pursuant to the above by mail or by any other means
shall be sent to:
Manager; Reorganization Department
Reorganization Window
The Depository Trust Company
7 Hanover Square, 23rd Street
New York, NY 10004-2695
6. All notices and payment advices sent to DTC shall contain the CUSIP
number of the Securities (listed on Schedule A hereto) and the accompanying
description of such Security, which as of the date of this letter is " ".
7. The Document indicates that the dividend rate for the Securities may
vary from time to time. Absent other existing arrangements with DTC, Issuer or
Trust Company shall give DTC notice of each such change in the dividend rate, on
the same day that the new rate is determined, by telephoning the Supervisor of
DTC's Dividend Announcement Section at (212) 709-1270, or by telecopy sent to
(212) 709-1723. Such verbal or telecopy notice shall be followed by prompt
written confirmation sent by a secure means in the manner set forth in Paragraph
4 to:
Manager; Announcements
Dividend Department
The Depository Trust Company
7 Hanover Square, 22nd Floor
New York, NY 10004-2695
8. The Document indicates that each purchaser must sign a purchaser's
letter which contains provisions restricting transfer of the Securities
purchased. Issuer and Trust Company acknowledge that as long as Cede & Co. is
the sole record owner of the Securities, Cede & Co. shall be entitled to all
voting rights applicable to the Securities and to receive the full amount of all
dividends, liquidation proceeds, and redemption proceeds payable with respect to
the Securities, even if the credits of Securities to the DTC accounts of any DTC
Participant ("Participant") result from transfers or failures to transfer in
violation of the provisions of the purchaser's letter. Issuer and Trust Company
acknowledge that DTC shall treat any Participant having Securities credited to
its DTC accounts as entitled to the full benefits of ownership of such
Securities. Without limiting the generality of the preceding sentence, Issuer
and Trust Company acknowledge that DTC shall treat any Participant having
securities credited to its DTC accounts as entitled to receive dividends,
distributions, and voting rights, if any, in respect of Securities and, subject
to Paragraphs 12 and 13, to receive certificates evidencing Securities if such
certificates are to be issued in accordance with Issuer's certificate of
incorporation. (The Treatment by DTC of the effects of the crediting by it of
Securities to the accounts of Participants described in the preceding two
sentences shall not affect the rights of Issuer, participants in auctions
relating to the Securities, purchasers, sellers, or holders of Securities
against any Participant.) DTC shall not have any responsibility to ascertain
whether any transfer of Securities is made in accordance with the provisions of
the purchaser's letter.
9. Issuer or Trust Company shall provide a written notice of dividend
payment and distribution information to a standard announcement service
subscribed to by DTC as soon as the information is available. In the unlikely
event that no such service exists, Issuer or Trust Company shall provide this
information directly to DTC electronically, as previously arranged by Issuer or
Trust Company and DTC,
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<PAGE> 4
as soon as the information is available. If electronic transmission has not been
arranged, absent any other arrangements between Issuer or Trust Company and DTC,
such information should be sent by telecopy to DTC's Dividend Department at
(212) 709-1723 or (212) 709-1686, and receipt of such notices shall be confirmed
by telephoning (212) 709-1270. Notices to DTC pursuant to the above by mail or
by any other means shall be addressed as follows:
Manager; Announcements
Dividend Department
The Depository Trust Company
7 Hanover Square, 22nd Floor
New York, NY 10004-2695
10. Issuer or Trust Company shall provide CUSIP-level detail for
dividend payments and distributions to DTC no later than noon (Eastern Time) on
the payment date.
11. Dividend payments and distributions shall be received by Cede &
Co., as nominee of DTC, or its registered assignees in same-day funds no later
than 2:30 p.m. (Eastern Time) on each payment date. Absent any other
arrangements between Issuer or Trust Company and DTC, such funds shall be wired
as follow:
The Chase Manhattan Bank
ABA #021 000 21
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Dividend Deposit Account #066-026776
12. Redemption payments shall be received by Cede & Co., as nominee of
DTC, or its registered assigns in same-day funds no later than 2:30 p.m.
(Eastern Time) on the payment date. Absent any other arrangements between Issuer
or Trust Company and DTC, such funds shall be wired as follows:
The Chase Manhattan Bank
ABA #021 000 21
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Redemption Deposit Account #066-027306
13. Reorganization payments and CUSIP-level detail resulting from
corporate actions (such as tender offers, remarketings, or mergers) hall be
received by Cede & co., as nominee of DTC, or its registered assigns in same-day
funds no later than 2:30 p.m. (Eastern Time) on the first payment date. Absent
any other arrangement between Issuer or Trust Company and DTC, such funds shall
be wired as follows:
The Chase Manhattan Bank
ABA #021 000 21
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Redemption Deposit Account #066-027608
14. DTC may direct Issuer or Trust Company to use any other number or
address as the number or address to which notices, payments of dividends,
distributions, or redemption proceeds may be sent.
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<PAGE> 5
15. In the event of a redemption acceleration, or any similar
transaction (e.g., tender made and accepted in response to Issuer's or Trust
Company's invitation) necessitating a reduction in the number of Securities
outstanding, or an advance refunding of part of the Securities outstanding DTC,
in its discretion: (a) may request Issuer or Trust Company to issue and
authenticate a new Security certificate; or (b) may make an appropriate notation
on the Security certificate indicating the date and amount of such reduction in
the number of Securities outstanding, except in the case of final redemption, in
which case the certificate the certificate will be presented to Issuer or Trust
Company prior to payment, if required.
16. In the event that Issuer determines that beneficial owners of
Securities shall be able to obtain certificated Securities, Issuer or Trust
company shall notify DTC of the availability of certificates. In such event,
Issuer or Trust Company shall issue, transfer, and exchange certificates in
appropriate amounts, as required by DTC and others.
17. DTC may discontinue providing its services as securities depository
with respect to the Securities at any time by giving reasonable notice to Issuer
or Trust Company (at which time DTC will confirm with Issuer or Trust Company
the aggregate principal amount of Securities outstanding). Under such
circumstances, at DTC's request Issuer and Trust Company shall cooperate fully
with DTC by taking appropriate action to make available one or more separate
certificates evidencing Securities to any DTC Participant having Securities
credited to its DTC accounts.
18. Issuer hereby authorized DTC to provide to Trust Company security
position listings of Participants with respect to the Securities from time to
time at the request of Trust Company. Issuer also authorizes DTC, in the event
of a partial redemption of Securities, to provide Trust Company, upon request,
with the names of those Participants whose positions in Securities have been
selected for redemption by DTC. DTC will use its best efforts to notify Trust
Company of those Participants whose positions in Securities have been selected
for redemption by DTC. Issuer authorizes and instructs Trust Company to provide
DTC with such signatures, examples of signatures, and authorizations to act as
may be deemed necessary or appropriate by DTC to permit DTC to discharge its
obligations to its Participants and appropriate regulatory authorities. Such
requests for security position listings shall be sent to DTC's Reorganization
Department in the manner set forth in Paragraph 5.
This authorization, unless revoked by Issuer, shall continue with
respect to the Securities while any Securities are on deposit at DTC, until and
unless Trust Company shall no longer be acting. In such event, Issuer shall
provide DTC with similar evidence, satisfactory to DTC, of the authorization of
any successor thereto so to act.
19. Nothing herein shall be deemed to require Trust Company to advance
funds on behalf of Issuer.
20. This Letter of Representations may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
but all such counterparts together constitute but one and the same instrument.
21. This Letter of Representations is governed by, and shall be
construed in accordance with, the laws of the State of California.
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<PAGE> 6
22. The following riders, attached hereto, are hereby incorporated into
this Letter of Representations:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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Notes:
A. If there is a Trust Company (as defined in this Letter of
Representations), Trust Company as well as Issuer must sign this Letter. If
there is no Trust Company, in signing this Letter Issuer itself undertakes to
perform all of the obligations set forth herein.
B. Schedule B contains statements that DTC believes accurately describe
DTC, the method of effecting book-entry transfers of securities distributed
through DTC, and certain related matters.
Very truly yours,
MUNIHOLDINGS NEW JERSEY INSURED
FUND IV, INC.
(ISSUER)
BY:
------------------------------------
(AUTHORIZED OFFICER'S SIGNATURE)
IBJ WHITEHALL BANK & TRUST COMPANY
(TRUST COMPANY)
BY:
------------------------------------
(AUTHORIZED OFFICER'S SIGNATURE)
Received and Accepted:
THE DEPOSITORY TRUST COMPANY
By:
------------------------------------
cc: Underwriter
Underwriter's Counsel
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SCHEDULE A
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(DESCRIBE ISSUE)
CUSIP Number Share Total Value ($ Amount)
------------ ----------- ----------------
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<PAGE> 9
RIDER TO THE LETTER OF REPRESENTATIONS
OF
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
AND
IBJ WHITEHALL BANK & TRUST COMPANY
DATED , 1999
1. This Rider supersedes any contradictory language set forth in the
Letter of Representations to which it is appended. Capitalized terms
used and not defined herein have the meaning set forth in the Letter of
Representations to which this Rider is appended.
2. The Prospectus indicates that in the event the Issuer retroactively
allocates any net capital gains or other income subject to regular
Federal income tax to shares of AMPS without having given advance
notice thereof to the Auction Agent as described in the Prospectus
solely by reason of the fact that such allocation is made as a result
of the redemption of all or a portion of the shares of AMPS outstanding
or the liquidation of the Issuer (the amount of such allocation being
referred to herein as a "Retroactive Taxable Allocation"), the Issuer,
within 90 days (and generally within 60 days) after the end of the
Issuer's fiscal year for which a Retroactive Taxable Allocation is
made, will provide notice thereof to the Auction Agent and to each
holder of shares of AMPS (initially Cede & Co. as nominee of DTC)
during such fiscal year at such holder's address as the same appears or
last appeared on the stock books of the Issuer. The Issuer, within 30
days after such notice is given to the Auction Agent, will pay to the
Auction Agent (who then will distribute to such holders of AMPS), out
of funds legally available therefor, an amount equal to the aggregate
Additional Dividend with respect to all Retroactive Taxable Allocations
made to such holders during the fiscal year in question.
3. The Issuer will notify DTC, at least 10 Business Days prior to the
payment date for any Additional Dividends, of (i) the record date for
holders of shares of AMPS entitled to receive Additional Dividends,
(ii) the amount of Additional Dividends payable on a per share basis to
such holders and (iii) the CUSIP numbers set forth on the stock
certificates representing such shares of AMPS.
4. The Prospectus indicates that if the Issuer does not give advance
notice of the amount of net capital gains or other income subject to
regular Federal income tax to be included in a dividend on shares of
AMPS in the related Auction, the Issuer may include such taxable income
in a dividend on shares of AMPS if it increases the dividend by an
additional amount calculated as if such income were a Retroactive
Taxable Allocation and the additional amount were an Additional
Dividend. The Issuer or the Auction Agent will notify DTC, at least
five Business Days prior to the applicable Dividend Payment Date, of
the amount of such additional amount to be included in the dividend on
a per share basis.
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5. The Prospectus indicates that in the event a Response (as defined in
the Prospectus) indicates that it is advisable that the Issuer give a
Notice of Special Dividend Period (as defined in the Prospectus) for
the AMPS, the Issuer, by no later than the second Business Day prior to
the relevant Auction Date (as defined in the Prospectus), may give a
Notice of Special Dividend Period to the Auction Agent, DTC and each
Broker-Dealer (as defined in the Prospectus), which notice will specify
(i) the duration of the Special Dividend Period (as defined in the
Prospectus), (ii) the Optional Redemption Price as specified in the
related Response and (iii) the Specific Redemption Provisions, if any,
as specified in the related Response. The Issuer is required to give
telephonic and written notice (a "Notice of Revocation") to the Auction
Agent, each Broker-Dealer, and DTC (as described in paragraph 6 hereof)
on or prior to the Business Day prior to the relevant Auction Date
under the circumstances specified in the Prospectus.
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